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Bottom v. Bailey

Court of Appeals of North Carolina

December 31, 2014

DAVID BOTTOM and KRYSTAL DAWN SANCHEZ BOTTOM, Plaintiffs,
v.
JAMES W. BAILEY, JR., 1031 EXCHANGE SERVICES, LLC, HOMETRUST BANK, a federally chartered mutual savings bank, and MORGAN STANLEY SMITH BARNEY, Defendants

Heard in the Court of Appeals 20 October 2014.

Editorial Note:

This Decision is not final until expiration of the twenty-one day rehearing period. [North Carolina Rules of Appellate Procedure 32(b)]

Appeal by plaintiff from order entered 7 February 2014 by Judge Alan Z. Thornburg in Buncombe County Superior Court.

Buncombe County. No. 11 CVS 824.

AFFIRMED.

Fisher Stark Cash, P.A., by W. Perry Fisher, II, Brad A. Stark and Colin A. McCormick, for plaintiff-appellants.

Moore & Van Allen PLLC, by Mark A. Nebrig and M. Cabell Clay, and Greenberg Traurig, P.A., by Bradford D. Kaufman (pro hac vice) and Joseph C. Coates, III (pro hac vice), for defendant-appellee Morgan Stanley Smith Barney.

STEELMAN, Judge. Chief Judge McGEE and Judge HUNTER concur.

OPINION

STEELMAN, Judge.

Where plaintiffs' complaint, viewed as admitted, failed to state a claim against defendant upon which relief may be granted, the trial court did not err in granting defendant's motion to dismiss pursuant to Rule 12(b)(6) of the North Carolina Rules of Civil Procedure, with prejudice.

I. Factual and Procedural History

David Bottom and Krystal Bottom (plaintiffs) owned real property in Buncombe County. On 11 November 2010, plaintiffs contracted with 1031 Exchange Services, LLC (1031) to provide intermediary services for a tax-deferred exchange pursuant to 26 U.S.C. § 1031. On 19 November 2010, plaintiffs sold the property, and the proceeds from the sale, $224,529.75, were deposited by 1031 into a fiduciary account at HomeTrust Bank (HomeTrust). Without plaintiffs' knowledge or permission, HomeTrust automatically transferred approximately $204,529.75 of the deposited funds into a separate sweep account in the name of 1031 at HomeTrust. HomeTrust comingled these monies with other accounts of James W. Bailey (Bailey), sole owner and manager of 1031, and various entities controlled by him. Funds in this separate account were then transferred back and forth between HomeTrust and Morgan Stanley Smith Barney (Morgan Stanley).

On 1 February 2011, Bailey was indicted in federal court for engaging in a 10-year check-kiting scheme involving the transfer of funds between HomeTrust and Morgan Stanley. Pursuant to this scheme, which involved more than $13,000,000, Bailey would write and deposit checks issued from accounts at HomeTrust into Morgan Stanley accounts, and vice versa, even though the accounts lacked sufficient funds to cover the transfers.

Morgan Stanley's parent company made numerous inquiries to its Asheville office over the 10-year period. Morgan Stanley generated one or more reports indicating suspicious or wrongful activities involving Bailey's Morgan Stanley accounts. On one or more occasions, representatives of Morgan Stanley questioned Bailey regarding his account activities. Morgan Stanley did not file Suspicious Activity Reports (SARs) with federal law enforcement or the Department of the Treasury as to Bailey's activities.

On 30 November 2010, Bailey, on behalf of 1031, attempted to deposit three non-certified checks drawn upon a HomeTrust account with Morgan Stanley in the total amount of $4,800,000. Plaintiffs' funds were a portion of the funds used to cover the $4,800,000. Morgan Stanley requested that the checks be certified. Bailey subsequently obtained three certified checks from HomeTrust in the amount of $4,800,000, and deposited them with Morgan Stanley.

On 13 December 2010, HomeTrust informed 1031 that there were insufficient funds to cover the 30 November 2010 certified checks. A hold was subsequently placed on 1031's account. On 26 December 2010, plaintiffs received notice that 1031's account had been frozen; the next day, plaintiffs went to HomeTrust seeking the return of their funds. HomeTrust declined to disburse plaintiff's funds.

On 9 February 2011, the federal government executed a seizure warrant upon HomeTrust for all of 1031's accounts, including the sweep account. This warrant was served on 16 February 2011. On 22 August 2011, HomeTrust sent 10 checks to the United States government totaling $44,231.58, from various accounts controlled by Bailey and his controlled entities. None of those funds came from the sweep account.

On 16 July 2013, plaintiffs filed an amended complaint against Bailey, 1031, Hometrust, and Morgan Stanley. The amended complaint alleged breach of contract, negligence, negligent misrepresentation, and breach of fiduciary duty by Bailey and 1031; breach of implied contract, negligence, breach of fiduciary duty, violation of N.C. Gen. Stat. § 32-9, conversion, violation of 31 U.S.C. § 5311 et seq., and aiding and abetting a breach of fiduciary duty by HomeTrust; and negligence, violation of N.C. Gen. Stat. § 32-9, violation of 31 § U.S.C. 5311 et seq., and aiding and abetting a breach of fiduciary duty by Morgan Stanley. The complaint also alleged unfair and deceptive practices and civil conspiracy, and sought equitable tracing or constructive trust, and an equitable lien, against all defendants.

On 17 September 2013, Morgan Stanley moved to dismiss plaintiffs' complaint against it, pursuant to Rule 12(b)(6) of the North Carolina Rules of Civil Procedure, on the grounds that plaintiffs were not customers of Morgan Stanley, that Morgan Stanley owed no duty to plaintiffs, fiduciary or otherwise, and that therefore plaintiffs " fail to allege the ultimate facts necessary to establish the essential elements of their claims[.]" On 7 February 2014, the trial court granted Morgan Stanley's motion to dismiss plaintiffs' complaint, with prejudice.

Plaintiffs appeal.

II. Standard of Review

" The motion to dismiss under N.C. R. Civ. P. 12(b)(6) tests the legal sufficiency of the complaint. In ruling on the motion the allegations of the complaint must be viewed as admitted, and on that basis the court must determine as a matter of law whether the allegations state a claim for which relief may be granted." Stanback v. Stanback, 297 N.C. 181, 185, 254 S.E.2d 611, 615 (1979) (citations omitted).

" This Court must conduct a de novo review of the pleadings to determine their legal sufficiency and to determine whether the trial court's ruling on the motion to dismiss was correct." Leary v. N.C. Forest Prods., Inc., 157 N.C.App. 396, 400, 580 S.E.2d 1, 4, aff'd per curiam, 357 N.C. 567, 597 S.E.2d 673 (2003).

" [T]o prevent a Rule 12(b)(6) dismissal, a party must . . . state enough to satisfy the substantive elements of at least some legally recognized claim. Additionally, we are not required . . . to accept as true allegations that are merely conclusory, unwarranted deductions of fact, or unreasonable inferences." Strickland v. Hedrick, ...


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