Most of the time, a contract breach—even if intentional—does not violate N.C. Gen. Stat. § 75-1.1. A contract breach, however, can turn into a 75-1.1 violation if the breach is accompanied by “substantial aggravating circumstances.”

We have looked before at the roots of the “substantial aggravating circumstances” doctrine. These origins show that “substantial aggravating circumstances” almost always refer to some type of deception. One can reach this conclusion by studying Bartolomeo v. S.B. Thomas, Inc., one of two seminal decisions that define this doctrine.

A recent decision by the U.S. District Court for the Eastern District of North Carolina confirms that Bartolomeo remains an important source of standards for contract-based 75-1.1 claims.

This post analyzes Di Sciullo v. Griggs & Co. Homes, a recent decision by Eastern District Judge Louise Flanagan. Di Sciullo involves a frequent issue in contract cases: competing interpretations of an ambiguous contract provision.

From the Jersey Shore to the Outer Banks

New Jersey residents Alan and Mary Jo Di Sciullo decided to build their retirement home on the Outer Banks. They interviewed several builders before they ultimately settled on Griggs & Company Homes.

The Di Sciullos and Griggs made a contract. The contract called for a $50,000 “fee to contractor.” The contract also said that the Di Sciullos would pay a $55,000 advance against fees. The contract recognized that Griggs would hire subcontractors, and that the job’s costs (for which the Di Sciullos were responsible) would include payments to subcontractors.

The Di Sciullos and Griggs, however, had different understandings of how the fee advance would work. The Di Sciullos thought that Griggs would hold the fee advance during construction and apply the advance to satisfy any outstanding costs at the end. Griggs, in contrast, understood the contract to allow Griggs to draw on the fee advance to pay for costs throughout the construction period.

Things went south during the construction process. Some of Griggs’s subcontractors didn’t get paid; some, in turn, put liens on the property. The Di Sciullos paid off the liens themselves to finalize the financing for the house.

The contract relationship ultimately ended, and the Di Sciullos demanded a return of the fee advance. Griggs told the Di Sciullos not only that they weren’t getting the advance back, but also that they owed money to Griggs for unpaid billable work.

From the Outer Banks to Federal Court

The Di Sciullos sued Griggs. They asserted the standard assortment of contract and tort claims, including breach of fiduciary duty, fraud, conversion, unjust enrichment, and violations of section 75-1.1.

After discovery, Griggs moved for partial summary judgment on about half of the claims, including the fiduciary-duty, fraud, and 75-1.1 claims.

Judge Flanagan ruled in Griggs’s favor on the fiduciary-duty and fraud claims. On the fiduciary-duty claim, Judge Flanagan concluded that the Di Sciullos lacked evidence to show that any fiduciary duty existed. The Di Sciullos pointed to a contract provision that required Griggs to use its “best skill and judgment,” but Judge Flanagan concluded that this common language did not transform an arm’s-length transaction into a fiduciary relationship.

On the fraud claim, Judge Flanagan concluded that the economic-loss rule prevented the Di Sciullos from suing in tort over the subject matter of a contract. The primary alleged misrepresentation, she pointed out, concerned a contract provision: the provision for the fee advance.

These rulings set the table for Judge Flanagan’s analysis of the Di Sciullos’ section 75-1.1 claim. Even though the Di Sciullos could not prove a fiduciary duty, and even though the economic-loss rule barred a fraud claim, could they nonetheless prevail on the same set of facts under section 75-1.1?

The answer, Judge Flanagan reasoned, turned on the real nature of the dispute. She held that the case was fundamentally a dispute over the meaning of a contract. She rejected the idea that the Di Sciullos’ 75-1.1 claim—to the extent that it was based on a fiduciary-duty theory or a fraud theory—could survive when the fiduciary-duty and fraud claims themselves had failed. She then assessed whether the Di Sciullos could salvage their 75-1.1 claim under a different theory: by showing “substantial aggravating circumstances” attendant to the breach.

To make that assessment, Judge Flanagan measured the Di Sciullos’ evidence against the evidence from Bartolomeo—the 1989 decision from the Fourth Circuit on which we’ve written before. She concluded that Griggs’s conduct was “far less severe” than the conduct in Bartolomeo. And the 75-1.1 claim failed in Bartolomeo.

Judge Flanagan’s analysis of the alleged “substantial aggravating circumstances” in Di Sciullo also bears study. She implied that the key question under this theory was whether Griggs abused its position by overcharging the Di Sciullos. This characterization is notable for at least three reasons:

• Bartolomeo implies that deception is a required feature of a “substantial aggravating circumstances” claim. Judge Flanagan’s characterization does not refer to any flavor of deception.

• Allowing a 75-1.1 claim to go forward on an “abuse of position” theory would have required a conclusion that Griggs had enough sway to take advantage of its contracting partners (the Di Sciullos), but not enough sway to be a fiduciary. That is a difficult needle to thread, especially when a written document governs the parties’ relationship.

• In Bumpers v. Community Bank of Northern Virginia, the North Carolina Supreme Court cast serious doubt on whether overcharging, other than in limited circumstances, can ever give rise to a section 75-1.1 violation.

Although Judge Flanagan’s opinion does not expressly mention these points, they still show the uphill climb that the Di Sciullos faced in making their argument about “substantial aggravating circumstances.”

Take-Home Points from a Home Dispute

The Di Sciullo decision offers important reminders for any party or lawyer who’s thinking of alleging both a contract breach and a 75-1.1 violation.

First, if you cast your 75-1.1 violation as a “substantial aggravating circumstances” claim, be ready to compare your facts with the facts of Bartolomeo—or at least be ready to show that your claim is consistent with Bartolomeo’s reasoning.

Second, use care in how you characterize your “substantial aggravating circumstances” claim. Characterizations that sound like fiduciary-duty claims, or overcharging claims, could fatally undermine your theory.

Finally, be prepared to show all the elements of a claim for misrepresentation. Your adversary might argue that, if “substantial aggravating circumstances” require deception, your claim requires actual and reasonable reliance on the alleged misrepresentation. The Di Sciullo decision did not focus on the Di Sciullos’ reliance on any particular misrepresentation. That point suggests that that evidence was weak or absent.

As these points show, a successful “substantial aggravating circumstances” claim must sidestep significant landmines—landmines that the Di Sciullos could not avoid.

Author: Stephen Feldman