Blog Post

Rule 11 Sanctions Imposed for Improper Breach of Fiduciary Duties Claims Against Rank-and-File Employees

           In September 2011, Southeast Air Charter, Inc. (“Southeast Air”) brought suit against three (3) employees (“Defendants”) alleging, among other things, breach of fiduciary duty and constructive fraud.   The North Carolina Business Court (“NCBC”) determined all defendants were rank-and-file employees of Southeast Air and therefore could not be subject to the breach of fiduciary duty and constructive fraud claims.  As such, Plaintiff and Plaintiff’s attorneys were subject to Rule 11 sanctions for bringing these claims without any factual basis.  In determining the appropriate amount of sanctions and the allocation of attorneys’ fees incurred by Defendants, Judge James Gale, Chief Special Superior Court Judge of the NCBC, ordered sanctions to be taxed against Plaintiff, but not Plaintiff’s counsel.[1]


            Rule 11(a) of the North Carolina Rules of Civil Procedure requires all pleadings to be signed by an attorney, certifying the information alleged is true to his/her personal knowledge, warranted by existing law or a good faith argument for the modification of existing law, and is not brought for any improper purpose.  If a pleading is signed in violation of Rule 11, the court must impose sanctions on the signing attorney, the represented party, or both.  Sanctions may consist of an order to pay the other parties reasonable fees incurred because of the filing, which include attorneys’ fees.


            Nearly fifteen (15) years ago, the North Carolina Supreme Court case of Dalton v. Camp made clear that a fiduciary duty claim against a non-officer or non-director is unlikely to survive a motion to dismiss.[2]  Therefore, “[a]bsent extraordinary circumstances of special relationships of trust and confidence leading to dominion and control, employees who are not also officers and directors should not be put to the burden of defending fiduciary duty claims.”[3]


            In this case, Southeast Air contended Defendants, while not officers or directors, did owe a fiduciary duty as a result of their employment status.  Southeast Air alleged Defendants had specific duties which gave them dominion and control over the company and its employees, making them “de facto officers.”  Furthermore, Southeast Air alleged Defendants were vested with sufficient trust and confidence regarding the company to subject them to the fiduciary duty and constructive fraud claims.  The NCBC disagreed, determining such claims were not well grounded in fact and/or warranted by existing law to justify the burden to Defendants.  Significantly, Southeast Air confirmed the same during a deposition of an officer, who referred to Defendants as “run of the mill” employees, who took direction from higher officials.


         Judge Gale ultimately decided Plaintiff’s counsel had a reasonable and good-faith belief to bring the claims when they were filed, thus saving him from Rule 11 sanctions.  However, Southeast Air was ordered to repay Defendants for their attorneys’ fees in excess of $17,000 for defending these two claims.  This case serves as a strong reminder that allegations of breach of fiduciary duty and constructive fraud should not be taken lightly.  Plaintiffs and their counsel would be well served to remember that the existence of a special relationship of trust and confidence must exist between the parties.



[1] Southeast. Air Charter, Inc. v. Stroud, 2015 NCBC 79.

[2] Dalton v. Camp, 335 N.C. 647, 548 S.E. 2d 704 (2001).

[3] Se. Air Charter.