Antitrust Law Daily Wrap Up, STATE UNFAIR TRADE PRACTICES—Bankr. W.D.N.C.: Fraud results in treble damage award under North Carolina deceptive practices law, (Oct 10, 2013)

By Tobias J. Gillett, J.D., LL.M.

A real estate developer committed fraud in inducing investors to lend him money to develop a subdivision by providing mortgage collateral worth far less than what he represented and in spending the money for other purposes, the federal bankruptcy court in Charlotte has ruled (In re: Brown, October 8, 2013, Whitley, J.). This conduct constituted a violation of the North Carolina Unfair and Deceptive Trade Practices Act, resulting in an award of treble damages

Tony Brown is a North Carolina real estate broker, developer, and investor. In 2008, Brown sent John Dean an e-mail inviting him and others to participate in the development of a subdivision by lending “about $500k for 12-18 months.” He offered to collateralize the loans by giving a mortgage on an office building. Dean, Mark Shaw, and Norman Park loaned Brown $150,000 each. Dean and Park received promissory notes and deeds of trust, but Shaw did not, although a note was promised to him. However, Brown soon began missing interest payments, and the loans went into default. When the lenders visited the subdivision, they learned that little if any of their money had been used to develop it. Instead, the money had been spent for other purposes. The office building proved to be encumbered with at least three prior deeds of trust, in a cumulative amount far greater than the amount Brown represented, and had a fair market value far less than what Brown claimed. Brown and his wife declared bankruptcy.

The lenders filed an adversary proceeding, asserting causes of action for (1) claim on loan, (2) conversion, (3) fraud, (4) unfair and deceptive trade practices, and (5) objection to dischargability.

Fraud. The court found that Brown had made several material misrepresentations constituting fraud, including claiming that he had final approval for a subdivision when approval from the county had not yet been given, misrepresenting the amount of debt encumbering the office building, misrepresenting the fair market value of the building, and falsely implying that the money lent would be used to develop the property. Moreover, Brown knew the plaintiffs would rely on his statements, due to their prior business relationships with him and his knowledge, as owner of the office building, of its value and indebtedness. The court found Brown intended to deceive the plaintiffs, causing them to suffer damages of $150,000 each, plus unpaid interest of $72,450, for a total of $222,450.

Dischargability. The court also granted the plaintiffs’ objection to dischargability. A debt could be deemed nondischargable of it was “incurred through: 1) a fraudulent misrepresentation; 2) which induced the plaintiff to act or refrain from acting; 3) which caused harm to the plaintiff; and 4) upon which the plaintiff justifiably relied.” Here, Brown made several fraudulent misrepresentations, the misrepresentations induced the plaintiffs to act, the misrepresentations caused harm to the plaintiffs that had not been repaid, and the plaintiffs justifiably relied on Brown’s statements as a result of their prior successful business transactions with him. Although the plaintiffs did not conduct a title search or hire a separate attorney, the court found there had been no red flags signaling the need to do so. Moreover, they had always previously relied on Brown’s attorney, and it was “not reasonable” to expect the California plaintiffs to conduct their own title search on the North Carolina properties or hire their own attorney.

Unfair and deceptive trade practices. The court concluded that Brown’s conduct violated the North Carolina Unfair and Deceptive Trade Practices Act. The court explained that “North Carolina courts have held that a plaintiff who proves fraud may thereby establish that an unfair or deceptive trade practice occurred.” Here, Brown’s conduct constituted fraud, his business activities were “made in or affecting commerce,” and his conduct caused injury to the plaintiffs. Therefore, the court trebled the plaintiffs’ damages, and awarded each plaintiff $667,350.

The case is No. 11-32223.

Attorneys: Christopher John Culp for Mark Shah and Norman Park. G. Martin Hunter for Tony Monroe Brown, Jr.

Cases: StateUnfairTradePractices NorthCarolinaNews