The Economic Loss Rule and Misrepresentation-Based Section 75-1.1 Claims
Ellis & Winters
We’re not alone in our interest in how the economic-loss doctrine applies to alleged violations of N.C. Gen. Stat. § 75-1.1.
In a recent case in the North Carolina Business Court involving section 75-1.1 claims, Judge Michael L. Robinson requested supplemental briefing on the economic-loss doctrine.
Judge Robinson’s sua sponte order was followed by his application of the doctrine to the plaintiff’s claims on the defendants’ summary judgment motion. This post examines Judge Robinson’s decision and its result that dismissed several claims based on the doctrine but allowed others to proceed.
Best Laid Airplans
Carmayer, LLC v. Koury Aviation, Inc. involved the sale of a plane that did not go as planned. If there were lemon laws for planes, this plane would be a candidate.
In October 2014, Amiel Rossabi (a lawyer) and Rocco Scarfone planned to purchase an aircraft to place into service as a charter jet through a federal program known as Part 135 that allows owners to generate profits from its use as a for-hire charter plane. But the aircraft has to meet certain standards to qualify under Part 135.
Rossabi and Scarfone settled on a 1976 Cessna 421C twin-engine propeller aircraft. They formed Carmayer LLC to buy the plane.
Early in their search, Rossabi and Scarfone were introduced to the defendants—a North Carolina company, its President, and its Director of Maintenance—as experts in the Part 135 process. The defendants wore several hats in the Carmayer plan:
- Carmayer sought advice from the defendants on the purchase.
- Carmayer sought advice on bringing the plane into compliance with the Part 135 program.
- Carmayer later signed a lease with the defendants to facilitate the charter of the Cessna 421C under Part 135 as part of the defendants’ fleet.
- Under the lease agreement, the defendants would also be responsible for monitoring the mechanical condition of the plane and advising Carmayer on the status of all scheduled maintenance, inspections, and overhaul of the plane.
But Carmayer’s plans quickly experienced turbulence. The aircraft did not qualify under Part 135 and would require extensive maintenance to qualify. Carmayer eventually took the plane from the defendants to get a second opinion, and learned there were 172 problems with the plane. Today, Carmayer believes the plane may never qualify for the Part 135 program.
Carmayer then sued the defendants. Carmayer’s complaint asserted claims for negligent misrepresentation, breach of fiduciary duty, and section 75-1.1 claims. No contract claim was alleged.
In their answer, the defendants’ affirmative defenses included the economic-loss doctrine. After discovery, however, they did not raise the doctrine in the briefing on their motion for summary judgment.
After a hearing on the motion, Judge Robinson issued his sua sponte order that requested additional briefing on the economic-loss issue.
Apparently sensing which way the wind was blowing, Carmeyer asked Judge Robinson for leave to file an amended complaint to add a contract claim—after the briefing process on the economic loss doctrine had been completed but before Judge Robinson ruled. Judge Robinson denied that request because Carmeyer had delayed in seeking leave to amend, and could have asserted the breach of contract as an alternative claim in its original pleading.
Judge Robinson began his analysis by separately evaluating each of the alleged negligent misrepresentations.
First, Judge Robinson relied on the economic loss doctrine in dismissing claims that post-dated the parties’ lease agreement regarding the airworthiness of the plane and the potential to add it to the defendants’ fleet. Judge Robinson found that these claims were all barred by the economic-loss doctrine. The agreement governed the defendants’ duty to advise Carmeyer on the plane’s condition and certification status, and there was no evidence of a separate and distinct duty to maintain the plane or add it to the defendants’ fleet.
But Judge Robinson allowed two other negligent-misrepresentation claims to proceed. Both claims involved representations made prior to the purchase of the plane and the parties signed the lease agreement.
The first was premised on a representation that one of the defendants was an expert on chartering aircraft under Part 135. Judge Robinson cited Scarfone’s affidavit testimony that the defendants had represented that the President was an expert in the process. Judge Robinson also cited the President’s testimony that he did not know how to get Part 135 approval. Judge Robinson dismissed other similar claims regarding the Director of Maintenance and the company itself, because those statements were made with reasonable care.
The other claim was based on pre-agreement representations that the defendants knew what was required to make the plane Part 135-compliant. Judge Robinson cited a conflict of testimony regarding whether the plane needed to be maintained pursuant to the factory recommendations to be eligible for Part 135. The Director of Maintenance testified that such maintenance was not required, while the company that gave the second opinion on the plane testified that it was required. Judge Robinson found that there was a material issue of fact on this point, and denied summary judgment.
Judge Robinson also dismissed the fiduciary duty claims, finding there was no fiduciary duty between the parties.
Negligent Misrepresentation Equals Chapter 75
Judge Robinson then addressed the section 75-1.1 claims. The complaint was thin on substance for these claims. Carmeyer instead just tied the claim to the negligent misrepresentation and breach of fiduciary duty claims.
As a result, Judge Robinson did not deeply analyze the section 75-1.1 allegations. Instead, he allowed the misrepresentation-based claims to proceed based on the two negligent misrepresentation claims that survived summary judgment.
Lessons for Litigants
The order in Carmeyer is an important read for North Carolina business litigators.
Carmeyer shows that, even after a defendant successfully shows that the economic-loss doctrine bars a claim for violation of section 75-1.1, the application of the doctrine might vary depending upon the timing and substance of the relevant conduct.
There’s another lesson in Judge Robinson’s denial of the motion to amend: a party cannot avoid the economic-loss doctrine simply by not pleading a valid contract claim. The Court’s denial of the motion to amend here could have been far more consequential if the Court had also dismissed the other tort claims.
Author: Jeremy Falcone