Summary:
The Debtors granted a Deed of Trust originally to Associates Financial, which was eventually sold or otherwise assigned to Citifinancial. The Deed of Trust included a legal description of the collateral, but did not include an address. Debtors later defaulted on a Deed of Trust. The Substitute Trustee instituted foreclosure proceedings and attempted personal service by Sheriff at three different addresses. When that failed, the Sheriff posted service at an address that was not for the collateral described in the Deed of Trust. Unaware of the defects in service, the Clerk of Court allowed the foreclosure to proceed and the collateral was sold to a third party.
The Debtors brought action to quiet title alleging breach of fiduciary duty by the Substitute Trustee and violation of due process due to improper service. On the motion by the Substitute Trustee, the trial court granted a motion to dismiss for failure to state a claim. The Debtors appealed.
The Court of Appeals affirmed the dismissal holding that pursuant to Rule 12(b)(6) dismissal for failure to state a claim is proper if:
The complaint on its face reveals that no law supports plaintiff's claim;
The complaint on its face reveals the absence of fact sufficient to make a good claim; or
Some fact disclosed in the complaint necessarily defeats plaintiff's claim.
To state a claim for breach of fiduciary duty, a the Debtors needed to:
1. Allege that a fiduciary relationship existed;
2. Allege that the fiduciary failed to act in good faith, consisting of:
a. Honesty in belief or purpose;
b. Faithfulness to one’s duty or obligation;
c. Observance of reasonable commercial standards of fair dealing in a given trade or business; or
d. Absence of intent to defraud or to seek unconscionable advantage; and
3. Allege that the fiduciary failed to act with due regard to the Debtors interests.
The bad faith test for breach of fiduciary duty requires willfulness and not mere negligence, "unless such failure is due to the deliberate desire to evade knowledge because of a belief or fear that inquiry would disclose a vice or defect in the transaction, that is to say, where there is an intentional closing of the eyes or stopping of the ears." See Edwards v. Bank, 39 N.C. App. 261, 268, 250 S.E.2d 651, 656-57 (1979). As the Debtors did not plead that the Substitute Trustee had acted in bad faith in the alleged breach of fiduciary duty, the Rule 12(b)(6) dismissal was proper.
Comments:
This opinion can have implications in two different scenarios- First, if a Debtor asserts a breach of fiduciary duty against a Substitute Trustee in the future, inclusion of pleadings asserting bad faith are necessary. Secondly and conversely, in a proceeding against a Debtor under 11 U.S.C. § 523(a)(4) for denial of dischargability due to breach of fiduciary duty, a similar finding of bad faith should be necessary.
Additionally, this opinion seems to move North Carolina pleading towards the more restrictive Iqbal/Twombley federal requirements and away from its traditionally more liberal standard that a "complaint should be liberally construed, and the court should not dismiss the complaint unless it appears beyond doubt that [the] plaintiff could prove no set of facts in support of his claim which would entitle him to relief." Goodman v. Holmes & McLaurin Attorneys at Law, 192 N.C. App. 467, 473, 665 S.E.2d 526, 531 (2008)
Evans v. Neill- Breach of Fiduciary Duty by Substitute Trustee in Foreclosure.PDF
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