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Barchiesi v. Charlotte School of Law, LLC

United States District Court, W.D. North Carolina, Charlotte Division

August 17, 2017

ROBERT C. BARCHIESI and LEJLA HADZIC, Individually and in a representative capacity on behalf of a class of all persons similarly situated, Plaintiffs,
v.
CHARLOTTE SCHOOL OF LAW, LLC and INFILAW CORPORATION, Defendants.

          ORDER

          Graham C. Mullen United States District Judge

         This matter is before the Court upon Defendants' Motion to Dismiss, and Plaintiffs' Motion to Strike Portions of Defendants' Memorandum of Law in Support of Motion to Dismiss and Exhibits. This action is one of several filed against Charlotte School of Law, LLC (“CSL”), its parent corporation, and others after CSL was placed on probation by the American Bar Association (“ABA”) in November of 2016 and CSL's access to federal student loan programs was revoked by the Department of Education (“DOE”) in December of 2016.

         I. FACTUAL BACKGROUND

         CSL was founded in 2006 and is one of three for-profit law schools owned by Defendant InfiLaw Corporation (“InfiLaw”).[1] (Am. Compl. ¶12). The ABA is the accrediting agency for programs awarding a Juris Doctorate. (Id. at ¶14). The ABA promulgates Standards and Rules of Procedure for Approval of Law Schools (“Standards”) with which law schools must comply in order to obtain accreditation and remain in good standing. (Id. at ¶15). CSL was granted full ABA accreditation in 2011, at a time when its total enrollment was 481 students. (Id. at ¶¶21-22). Just three years later, in 2014, CSL's enrollment had ballooned to 1392 students. (Id.). In February of 2009, under the guidance and control of InfiLaw, CSL executed a Program Participation Agreement (“PPA”), allowing CSL to participate in student financial aid programs and making CSL students eligible for federal student loans. (Id. at ¶16). CSL's tuition and fees for the 2016-2017 academic year exceeded $44, 000 for full-time students. (Id. at ¶20).

         In March of 2014, an ABA “site team” visited CSL to conduct an evaluation of the school and met with InfiLaw president Rick Inatome and CSL's administration. (Id. at ¶25). CSL was provided with the ABA Inspection Report on September 15, 2014, and CSL responded to the Inspection Report in October of 2014. (Id. at ¶26). Following a January 2015 meeting, the ABA Accreditation Committee (“Committee”) issued a decision (“First Decision”) stating there was “reason to believe” that CSL had “not demonstrated compliance” with multiple ABA standards, and requested additional information to assess CSL's possible non-compliance with several other ABA Standards, including Standards 301(a), [2] 501(a), [3] 501(b), [4] and Interpretation 501-1.[5] (Id. at ¶27).

         CSL provided additional information to the Committee in December of 2015. (Id. at ¶29). On February 3, 2016, the Committee issued a decision (“Second Decision”) determining CSL was “not in compliance” with Standards 301(a), 501(a), 501(b), and Interpretation 501-1, and specifically found:

[CSL] has not demonstrated that it is maintaining a rigorous program of legal education that prepares its students, upon graduation, for admission to the bar and for effective, ethical, and responsible participation as members of the legal profession; maintaining sound admissions policies and practices consistent with the Standards, its mission, and the objectives of its program of legal education; or is admitting applicants who do not appear capable of satisfactorily completing its program of legal education and being admitted to the bar.

(Id. at ¶30). The Committee also notified CSL that a hearing would be held in June of 2016 “to determine whether to impose sanctions in connection with [CSL's] noncompliance with the Standards.” (Id. at ¶¶31-32). The Committee held a hearing on June 23, 2016, attended by CSL Dean Jay Conison and other CSL employees. (Id. at ¶36). In July, 2016, the Committee issued its last decision (“Third Decision”), again finding CSL was out of compliance with Standards 301(a), 501(a), 501(b), and Interpretation 501-1, describing CSL's noncompliance as “substantial and persistent, ” and held that CSL's plans for bringing CSL into compliance with the Standards “have not proven effective or reliable.” (Id. at ¶37). The Third Decision instructed CSL to make remedial actions, supply additional information to the Committee, disclose the Third Decision to CSL's students and the public, and appoint a fact finder to review multiple issues, including CSL's admissions policies, academic rigor, bar examination results, student loan default rates, and graduate employment outcomes. (Id. at ¶38).

         Defendants did not disclose the Third Decision to CSL's students or the public as ordered by the Committee. (Id. at ¶39). In August of 2016, CSL appealed portions of the Third Decision, but did not appeal the Committee's finding of noncompliance with Standards 301 and 501, and instead requested the requirement that CSL publicly disclose the findings of noncompliance be eliminated. (Id. at ¶¶40-41). In support of their request, Jay Conison contended that if CSL publicly disclosed the Committee's findings of noncompliance, it would materially affect the decision of current and prospective students to attend CSL, in that many students and prospective students would decide not to attend CSL based upon the noncompliance. (Id. at ¶42).

         On November 14, 2016, the ABA issued a decision entitled “Notice of Probation and Specific Remedial Action, ” concluding that CSL was still not in compliance with Standards 301(a), 501(a), 501(b), that the noncompliance was “substantial” and “persistent, ” and that CSL's plans to bring CSL into compliance “have not proven effective or reliable.” (Id. at ¶43). CSL was placed on probation by the ABA and ordered to disclose its noncompliance for a second time. CSL was further ordered to publish information regarding its probationary status “prominently on its website.” (Id. at ¶44).

         Plaintiffs allege that Defendants continued to promote and maintain on CSL's website, during all relevant periods, that CSL was fully accredited by the ABA, and that CSL was found “in full compliance with ABA Standards.” (Id. at ¶¶60-62). Defendants also represented on CSL's website, at all relevant times, that a “rigorous curriculum has been created to ensure that our students are equipped with practical skills that will allow them to thrive in a professional setting” despite the ABA's Second and Third Decisions that CSL was noncompliant with Standard 301(a) requiring CSL to “maintain a rigorous program . . . .” (Id. at ¶63).

         Plaintiffs, former CSL students, filed their Complaint on December 22, 2016, on behalf of themselves and a class of similarly situated students, alleging causes of action under the North Carolina Unfair and Deceptive Trade Practices Act (“UDTPA”), for Unjust Enrichment, Breach of Fiduciary Duty, and Constructive Fraud. Plaintiffs subsequently filed their First Amended Complaint, maintaining the same causes of action on behalf of an additional proposed class of plaintiffs. Defendants have moved to dismiss pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure for failure to state a claim upon which relief can be granted.

         II. DISCUSSION

         A. Standard for 12(b)(6) Motions to Dismiss

         To avoid dismissal, a complaint must contain facts sufficient “to raise a right to relief above the speculative level” and to show that the claim is “plausible on its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555, 570 (2007). A claim is plausible only “when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged” - a standard that requires more than facts “that are ‘merely consistent with' a defendant's liability.” Ashcroft v. Iqbal, 556 U.S. at 678 (quoting Twombly, 550 U.S. at 557). “Threadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice.” Iqbal, 556 U.S. 662, 678. A court need not accept as true a plaintiff's “unwarranted inferences, unreasonable conclusions, or arguments.” Giarratano v. Johnson, 521 F.3d 298, 302 (4th Cir. 2008) (citation and internal quotation marks omitted).

         B. Breach of Fiduciary Duty

         Under North Carolina law, to state a claim for breach of fiduciary duty, a plaintiff must show that “(1) the defendant owed the plaintiff a fiduciary duty of care; (2) the defendant violated that duty; and (3) the breach of duty proximately caused the plaintiff's injury.” Marketel Media Inc. v. Mediapotamus, Inc., Nos. 13-cv-427, 13-cv-693, 2015 WL 2401001, at *7-8 (E.D. N.C. May 19, 2015); see Green v. Freeman, 749 S.E.2d 262, 268 ( N.C. 2013). Defendants contend that Plaintiffs' claim must fail as they cannot establish the first element - the existence of a cognizable fiduciary relationship between themselves and Defendants.

         The North Carolina Supreme Court has stated that a fiduciary relationship “exists in all cases where there has been a special confidence reposed in one who in equity and good conscience is bound to act in good faith and with due regard to the interests of the one reposing confidence.” Abbitt v. Gregory, 160 S.E. 896, 906 ( N.C. 1931). Ordinarily, the existence or nonexistence of a fiduciary duty is dependent on the circumstances of each case and is generally a question of fact for the jury. Stamm v. Salomon, 551 S.E.2d 152, 158 ( N.C. Ct. App. 2001), rev. denied, 560 S.E.2d 139 ( N.C. 2002). Nevertheless, North Carolina courts have generally refused to recognize a fiduciary relationship as a matter of law in certain cases, such as cases between an employer and employee and between businesses with equal bargaining power negotiating at arm's length. See McCants v. National Collegiate Athletic Ass'n, 201 F.Supp.3d 732 (M.D. N.C. 2016). Most importantly with regard to this case, courts applying North Carolina law have repeatedly rejected attempts to hold schools to a fiduciary standard vis-à-vis their students.[6] See, e.g., Ryan v. Univ. of N.C. Hosps., 609 S.E.2d 498, *4 ( N.C. Ct. App. 2005) (rejecting the imposition of a fiduciary duty in the “academic setting”); McCants, 201 F.Supp.3d at 749 (finding no fiduciary relationship exists because “North Carolina courts have been reluctant to extend the concept of fiduciary relationships to the academic setting”); J.W. v. Johnston Cty. Bd. of Educ., No. 5:11-CV-707-D, 2012 WL 4425439, at *14 (E.D. N.C. Sept. 24, 2012) (same).[7] Plaintiffs' attempts to distinguish these cases are unavailing.

         In Ryan, the court explained that divided loyalties that are inherent to an academic setting preclude ...


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