Jonathan Folmar v. Cooke Realty, Inc. , 650 F. App'x 818 ( 2016 )

UNPUBLISHED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unpublished per curiam opinion.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Unpublished opinions are not binding precedent in this circuit.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
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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
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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
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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
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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
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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.
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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
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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.
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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
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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
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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,
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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.
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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.
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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.
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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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