Court Opinion

ID: 3208059
Source: CourtListenerOpinion
Date Created: 2016-05-31 19:01:17.652022+00
Date Added: 2024-06-11T14:29:06.244446
License: Public Domain

UNPUBLISHED

                  UNITED STATES COURT OF APPEALS
                      FOR THE FOURTH CIRCUIT

                            No. 15-1541

JONATHAN RUSSEL FOLMAR; MARGARET FOLMAR,

                Plaintiffs - Appellants,

           v.

SARAH HARRIS, individually and as an agent for Cooke Realty,
Inc.; COOKE REALTY, INC.,

                Defendants - Appellees.

Appeal from the United States District Court for the Eastern
District of North Carolina, at Wilmington. James C. Dever III,
Chief District Judge. (7:14-cv-00256-D)

Argued:   May 10, 2016                     Decided:   May 31, 2016

Before MOTZ, KING, and HARRIS, Circuit Judges.

Affirmed in part and reversed        and   remanded   in   part   by
unpublished per curiam opinion.

ARGUED: Fred William DeVore, IV, DEVORE, ACTON AND STAFFORD,
P.A., Charlotte, North Carolina, for Appellants.     Clay Allen
Collier, CROSSLEY MCINTOSH COLLIER HANLEY & EDES, PLLC,
Wilmington, North Carolina, for Appellees. ON BRIEF: Jarrett W.
McGowan, CROSSLEY MCINTOSH COLLIER HANLEY & EDES, PLLC,
Wilmington, North Carolina, for Appellees.

Unpublished opinions are not binding precedent in this circuit.
PER CURIAM:

        Jonathan and Margaret Folmar, buyers of a North Carolina

home, brought this suit against their real estate agent, Sarah

Harris,    and    her   real   estate    company,          Cooke    Realty,      alleging

fraud,     misrepresentation,         breach         of     fiduciary          duty,     and

deceptive trade practices, and seeking punitive damages.                                 The

district court granted the realtors’ motion to dismiss on issue

preclusion       grounds,   relying     on    the     Folmars’      earlier      suit     in

state court against the sellers of the house.                           For the reasons

that follow, we affirm in part and reverse and remand in part.

                                         I.

        In 2012, the Folmars agreed to purchase a home on the coast

of   North   Carolina       from   Samuel      and    Louise       Kesiah.        Harris,

through her employer Cooke Realty, acted as a dual agent for

both the Folmars and the Kesiahs.                     Prior to closing on the

property, the Kesiahs stated in a disclosure form that they did

not know of any problems with “things such as the foundation,

slab, floors, windows, doors, ceilings, interior and exterior

walls, patio, deck, or other structural components.”                           Soon after

receiving    the     disclosure     form,      the     Folmars      commissioned         an

independent home inspection.                 The resulting inspection report

noted    various    issues,    including       that       “some    of    the    siding    is

missing and there is some wood rot on the wall above front

                                         2
door”; “[u]pstairs door off the master has some wood rot and is

very hard to open”; “[t]he window on the back left side looks to

have water entering from the top of the window, staining is

inside    of    window.        Possible     hidden       damage    may   exist.”      The

inspection report recommended that “[e]ach issue indicated in

this    summary    []     be    evaluated       by   a    qualified      contractor    or

specialist for corrective measures to insure proper and safe use

or service of the system in question.”

       After the inspection report but before closing, the Folmars

hired Daryl Moffett to complete some minor repair work on the

home after closing.            Moffett met with Harris at the house before

closing to get a better idea of the work required.                         While on the

property, Moffett noticed a deteriorated section of siding next

to the front door.             As Moffett stood next to Harris, he pressed

his hand against the wall and “a piece of wall cladding fell

off,    exposing    rotted       oriented      strand     board    (OSB)    sheathing.”

Harris tried unsuccessfully to reattach the piece to the wall,

and then told Moffett that the rotting sheathing had already

been listed on the home inspection report.                        The Folmars allege

that,    despite     Harris’        fiduciary        obligations,        Harris    never

reported the issue to them.

       The     Folmars    proceeded       to     close     on     the    home.     After

discovering the extent of the home’s hidden structural damage,

they    brought    suit    in    North    Carolina       state    court    against    the

                                            3
Kesiahs, Harris, and Cooke Realty (“Folmar I”).                              Against the

Kesiahs,         the    Folmars     alleged        fraud,    misrepresentation,            and

breach      of     contract;       against    Harris        and   Cooke     Realty,       they

alleged fraud, misrepresentation, breach of fiduciary duty, and

unfair      and     deceptive       trade    practices.           The    Folmars      sought

punitive damages against all parties.

      The    state       trial     court    granted     summary      judgment       for    the

Kesiahs      and       the   Folmars    voluntarily          dismissed      their     claims

against Harris and Cooke Realty without prejudice.                                The North

Carolina Court of Appeals affirmed the trial court’s judgment,

noting that even if the Kesiahs knew of the defects before they

sold the property to the Folmars, the Folmars’ reliance on the

Kesiahs’ representation that they knew of no structural defect

was not reasonable in light of the Folmars’ independent home

inspection report.

      The Folmars then filed the instant action against Harris

and   Cooke       Realty      in   federal     district       court,      again     alleging

fraud,      misrepresentation,              breach     of     fiduciary       duty,        and

deceptive trade practices against both Harris and Cooke Realty,

and seeking punitive damages against Harris.                            Harris and Cooke

Realty    moved        to    dismiss,   arguing       that    the    Folmars’       previous

state suit precluded them from bringing these claims.                                     In a

brief     order        and    judgment,      the     district       court   granted        the

                                              4
Appellees’ motion and dismissed the case on issue preclusion

grounds.

      The Folmars noted this timely appeal.

                                        II.

      On appeal, the Folmars argue that their suit against Harris

and   Cooke      Realty   involves    different      issues    than   their   suit

against the Kesiahs, and that the district court therefore erred

in granting the motion to dismiss on issue preclusion grounds.

Harris and Cooke Realty (Appellees) respond that “the issue of

reasonable reliance [] is an essential and material element to

each of [the Folmars’] claims,” and that “[b]ecause this issue

was resolved against them in the prior action, Appellants are

barred from relitigating the issue in their favor in the current

action.”        Appellees’ Br. at 8.

      We   review     issue    preclusion      arguments      de   novo.     United

States     v.    Fiel,    35 F.3d 997,    1005   (4th   Cir.    1994).      For

judgments in diversity cases, as we have here, a federal court

looks to state preclusion law.                Taylor v. Sturgell, 553 U.S.
880, 891 n.4 (2008).             In North Carolina, collateral estoppel

(issue preclusion) “precludes relitigation of an issue decided

previously in judicial or administrative proceedings, provided

the party against whom the prior decision was asserted enjoyed a

full and fair opportunity to litigate that issue in an earlier

                                         5
proceeding.”         Rymer v. Estate of Sorrells, 488 S.E.2d 838, 840

(N.C. App. 1997); Thomas M. McInnis & Assoc., Inc. v. Hall, 349
S.E.2d 552, 558 (N.C. 1986) (noting that North Carolina allows

non-mutual defensive use of collateral estoppel).

     For issue preclusion to apply, several factors must be met:

“(1) the issues must be the same as those involved in the prior

action,   (2)       the    issues    must      have    been    raised     and    actually

litigated in the prior action, (3) the issues must have been

material and relevant to the disposition of the prior action,

and (4) the determination of the issues in the prior action must

have been necessary and essential to the resulting judgment.”

State v. Summers, 528 S.E.2d 17, 20 (N.C. 2000).                            We address

each of the Folmars’ claims in turn to determine whether these

requirements have been met.

                                              III.

     We turn first to the Folmars’ fraud claim.                       To prove actual

fraud   in     North      Carolina,       a    party    must   show:       “(1)     false

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.            Additionally, (6) plaintiff’s reliance on any

misrepresentations must be reasonable.”                      MacFadden v. Louf, 643
S.E.2d 432, 434 (N.C. Ct. App. 2007) (alteration and internal

                                               6
quotation marks omitted).              In the context of property sales,

“reliance is not reasonable if a plaintiff fails to make any

independent investigation” unless the plaintiff can demonstrate

(1) he “was denied the opportunity to investigate the property,”

(2)   he    “could   not    discover        the    truth    about     the   property’s

condition by exercise of reasonable diligence,” or (3) he “was

induced to forego additional investigation by the defendant’s

misrepresentations.”            Id.   (alteration          and   internal    quotation

marks omitted). 1

      For    example,      in   MacFadden,        home-purchasers       brought    suit

against the home-sellers for alleged undisclosed defects in the

property.     Id. at 433.        The court rejected the claim based on a

lack of reasonable reliance:                    “Plaintiff failed to establish

that her reliance was justifiable because she conducted a home

inspection before closing and that inspection report put her on

notice of potential problems with the home.”                     Id. at 434.      As in

this case, the inspection report pointed out potential serious

problems     with    the    house     and    suggested       having    a    contractor

      1“As a federal court sitting in diversity, we are obliged
to interpret and apply the substantive law of [the relevant]
state.”   Food Lion v. Capital Cities/ABC, Inc., 194 F.3d 505,
512 (4th Cir. 1999).    Where the state’s highest court has not
“applied its law to circumstances exactly like those presented
in this case,” we can look to state courts of appeals cases as
persuasive in determining how the high court would decide these
issues.   Id.   We do so here in the absence of on-point North
Carolina Supreme Court case law.

                                            7
further assess the property, but the MacFaddens conducted no

additional inspection.             Id. at 434-35.             The Folmar I fraud claim

against the Kesiahs essentially mirrored the facts of MacFadden

and was dismissed on that basis.

     On appeal here, the Folmars argue that the timing of the

inspection     report        in     relation        to     the       fraudulent          conduct

distinguishes       this     case       from    Folmar        I    for    issue    preclusion

purposes.     The Folmars contend that while their reliance on the

Kesiahs’ statements was unreasonable because they received the

Kesiahs’ disclosure before the home inspection occurred, their

reliance      on       Harris           and        Cooke           Realty’s        fraudulent

misrepresentations         was     reasonable       because          they   occurred       after

the home inspection report.               Because of this timing, the Folmars

maintain     that     they    reasonably           could          have    relied    on    their

realtors instead of the report.                     The Folmars also argue that

these      distinct        factual        bases        render            issue     preclusion

inappropriate       here.         See    18    James     W.       Moore   et     al.,    Moore’s

Federal Practice § 132.02[2][e] (3d. ed.) (“[A] difference in

pertinent facts, sufficient to substantially change the issues,

renders the doctrine of [collateral estoppel] inapplicable.”).

That is, Folmar I concerned the Kesiah’s disclosure report and

                                               8
their concealment of the rot with “new materials,” 2 while the

instant    case     involves       Harris’s   nondisclosure       of   the    wall-

cladding incident.

       Regardless       of   whether    the     issues    are     identical       for

preclusion purposes, we conclude that the Folmars have failed to

state a claim for fraud against Harris and Cooke Realty.                      North

Carolina courts have consistently dismissed fraud claims against

both sellers      and    realtors     based   on   a   purchaser’s     failure     to

reasonably     investigate          property,      without      considering       the

specific    timing    of     the   inspection   report    in    relation     to   the

fraud.     See, e.g., Helms v. Holland, 478 S.E.2d 513, 517 (N.C.

App. 1996); Rosenthal v. Perkins, 257 S.E.2d 63, 66 (N.C. App.

1979).

   2 In Folmar I, the North Carolina Court of Appeals described
the fraud issue as follows:
   [P]laintiffs assert that the Kesiah defendants falsely
   represented material facts:     by marking “no” on the
   disclosure report which stated “to your knowledge, is
   there any problem (malfunction or defect)” with things
   such as the foundation, slab, floors, windows, doors,
   ceilings, interior and exterior walls, patio, deck, or
   other structural components; learning of the defects in
   the property sometimes after 2006 and intentionally
   listing the property below value to “entice buyers as
   opposed   to   correcting   the   defects”;  previously
   performing work on the windows, sheathing, exterior
   walls, etc. prior to selling the home to plaintiffs and
   covering up existing rot with new materials; and having
   knowledge that many of the areas of the property were
   missing sheathing.

                                         9
       For example, in Robertson v. Boyd, 363 S.E.2d 672 (N.C.

App.   1988),    the    Robertsons       purchased    a    house    from    the     Boyds

through realtor Booth; when the Robertsons discovered extensive

termite damage after moving in, they sued Booth and the Boyds

for fraud, arguing that the defendants knew of the damage but

concealed it.         Id. at 675-76.            The court dismissed the claims

against both parties, explaining that, prior to closing, the

Robertsons      had    obtained     an   inspection       report    that       indicated

termite damage and suggested further inspection.                          Id. at 676.

The    court    did    not   undertake     separate       reliance    analyses        for

sellers and realtor, nor did it discuss the timing of the report

in relation to the realtors’ alleged concealment.                          Rather, it

simply reasoned that, because “the failure of the purchaser to

make    diligent      inquiries     when     he    has     notice    of    a       problem

precludes a recovery for fraud,” the trial court “did not err in

dismissing plaintiffs’ actions in fraud against all defendants.”

Id. (emphasis added).             Applying this reasoning to the instant

case, we must affirm the district court’s dismissal of the fraud

claim against Harris and Cooke Realty under North Carolina law.

                                          IV.

       We turn next to the Folmars’ misrepresentation claim.                          “The

tort    of     negligent      misrepresentation           occurs    when       a    party

justifiably      relies      to   his    detriment    on    information        prepared

                                           10
without reasonable care by one who owed the relying party a duty

of care.”     Hudson-Cole Dev. Corp. v. Beemer, 511 S.E.2d 309, 313

(N.C. App. 1999).        North Carolina courts treat the “reliance”

elements      in      fraud      and      misrepresentation         cases       as

interchangeable.      See McFadden, 643 S.E.2d at 435; Marcus Bros.

Textiles, Inc. v. Price Waterhouse, LLP, 513 S.E.2d 320, 327

(N.C. App. 1999); Helms v. Holland, 478 S.E.2d 513, 517 (N.C.

App. 1996).        Accordingly, we also affirm the district court’s

dismissal of the Folmars’ misrepresentation claim against the

Appellees.

                                       V.

     Next, we consider the Folmars’ breach of fiduciary duty

claim.     To state a claim for breach of fiduciary duty in North

Carolina, a plaintiff must show the existence of a fiduciary

relationship between the parties, breach of a duty required by

that relationship, and injury proximately caused by the breach.

Dalton   v.   Camp,   548 S.E.2d 704,   707      (N.C.   2001);   White   v.

Consol. Planning, Inc., 603 S.E.2d 147, 155 (N.C. App. 2004).

On appeal, Harris and Cooke Realty argue that this “proximate

cause”   requirement    is    identical     to   the    “reasonable     reliance”

element of fraud claims.         For this reason, they contend that the

state court’s finding of no reasonable reliance precludes the

                                       11
Folmars    from   arguing   that     proximate    cause   exists        here.     We

disagree.

     “It is now well settled [in North Carolina] that a broker

representing a purchaser or seller in the purchase or sale of

property owes a fiduciary duty to his client based upon the

agency relationship itself.”           Kim v. Prof’l Bus. Brokers Ltd.,

328 S.E.2d 296, 299 (N.C. App. 1985).              “[A] real estate broker

has a duty to make full and truthful disclosure of all known or

discoverable facts likely to affect the client.              And, the client

may rely upon the broker to comply with this duty and forego his

or her own investigation.”           Sutton, 712 S.E.2d at 323; John v.

Robbins,    764 F. Supp. 379,     390    (M.D.N.C.     1991)    (“[Defendant

brokers] may not evade their duty to communicate directly to

their     principals     simply      by     demonstrating         the     material

information was otherwise available to [their clients].”).                      Dual

agents, like Harris and Cooke Realty, are subject to the same

obligations because “[a] dual agent owes all fiduciary and other

agency duties to both principals.”               Brown v. Roth, 514 S.E.2d
294, 296 (N.C. App. 1999).

     Because this fiduciary relationship places an affirmative

burden     on   the   realtor   to    disclose,     regardless      of     outside

information available to the client, “proximate cause” in the

context of fiduciary breach cannot be coextensive with fraud’s

“reasonable reliance.”          As discussed above, for fraud claims,

                                       12
reliance on realtor conduct is not reasonable if the buyer has

notice       of    a   problem    and     fails       to    investigate         himself;    in

contrast,         under      realtors’       fiduciary       duty,       a     realtor    must

disclose material information and the buyer “can forego his or

her own investigation.”                Sutton, 712 S.E.2d at 323.                  Thus, the

terms refer to very different spheres of legal responsibility on

both the buyers’ and the realtors’ part.                           Cf. B & B Hardware,

Inc.    v.    Hargis      Indus.,      Inc.,    135    S.    Ct.       1293,    1306     (2015)

(“[I]ssues are not identical [for preclusion purposes] if the

second       action       involves      application         of     a     different        legal

standard, even though the factual setting of both suits may be

the same.”).           Put another way, any conception of “reasonable

reliance”         in   the    breach    of     fiduciary      duty      context     must    be

defined differently than in fraud claims because we expect much

more reliance on fiduciaries, by virtue of their positions of

trust.

       Because the state court in Folmar I did not assess any of

the elements necessary for a breach of fiduciary duty claim,

issue preclusion cannot prevent the Folmars from raising such a

claim    now      against     Harris     and   Cooke       Realty.       Accordingly,       we

reverse the district court’s dismissal of this claim and remand

for further proceedings.

                                               13
                                           VI.

      The district court also dismissed the Folmars’ claim of

unfair trade practices as precluded.                      North Carolina General

Statute     §   75–1.1       provides   in    pertinent        part    that    “[u]nfair

methods of competition in or affecting commerce, and unfair or

deceptive       acts    or    practices      in   or    affecting       commerce,     are

declared unlawful.”           To establish a prima facie claim for unfair

trade   practices,       “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.”                          Dalton, 353 N.C.

at   656.

      Realtor conduct related to the selling and buying of houses

qualifies as “affecting commerce,” see Sutton, 712 S.E.2d at

326, and “North Carolina case law has held that conduct which

constitutes a breach of fiduciary duty . . . is sufficient to

support a UDTP claim.”              Compton v. Kirby, 577 S.E.2d 905, 917

(N.C. App. 2003); Robertson, 363 S.E.2d at 676.                           Because the

Folmars’ unfair trade practice claim is essentially derivative

of their breach of fiduciary duty claim, which is not precluded,

we hold that their unfair trade practices claim is also not

precluded.       We therefore reverse the district court’s dismissal

of this claim and remand for further proceedings.

                                             14
                                              VII.

     Finally,        we    turn    to    the    Folmars’        request        for      punitive

damages against Harris.             In North Carolina, punitive damages are

awarded “to punish a defendant for egregiously wrongful acts and

to   deter     the    defendant         and    others        from    committing          similar

wrongful acts.”           N.C. Gen. Stat. Ann. § 1D-1 (2015).                          To obtain

punitive     damages,      a   plaintiff        must    show        that   a   defendant      is

liable for compensatory damages as well as the presence of one

or more “aggravating factors” -- fraud, malice, or willful or

wanton conduct.           N.C. Gen. Stat. § 1D-15.                  Conduct underlying a

breach   of     fiduciary        duty    can    support        an     award       of    punitive

damages, see HAJMM Co. v. House of Raeford Farms, Inc., 403
S.E.2d 483, 490 (N.C. 1991), as can conduct constituting unfair

and deceptive trade practices, see Zubaidi v. Earl L. Pickett

Enters., Inc.,        595 S.E.2d 190, 193 (N.C. App. 2004).

     As discussed above, Folmar I precludes neither the Folmars’

claim    for     breach     of     fiduciary          duty     nor    for      unfair      trade

practices.           We   therefore       conclude           that    their     request       for

punitive       damages     based    on        those     claims       is     not    precluded.

Accordingly, we reverse the district court’s dismissal of the

Folmars’ punitive damages claim and remand.

                                               15
                                VIII.

     In sum, we affirm the district court’s dismissal of the

Folmars’ fraud and misrepresentation claims against Harris and

Cooke Realty.   We reverse the court’s dismissal of the breach of

fiduciary duty and the unfair trade practices claims against

Harris and Cooke Realty and the request for punitive damages

against   Harris,   and   we   remand   those   claims   for   further

proceedings.

                                                 AFFIRMED IN PART AND
                                        REVERSED AND REMANDED IN PART

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