CommScope Credit Union v. Butler & Burke, LLP
790 S.E.2d 657
N.C.2016Background
- CommScope Credit Union engaged Butler & Burke, LLP to perform annual independent audits from 2001–2010; CommScope later was assessed approximately $374,200 in IRS penalties because Form 990 was not filed for 2001–2009.
- CommScope sued Butler & Burke for breach of contract, negligence, breach of fiduciary duty, and professional malpractice, alleging the auditor failed to request/review tax returns and detect the omission.
- Butler & Burke moved to dismiss under Rule 12(b)(6) and for judgment on the pleadings under Rule 12(c), asserting affirmative defenses including contributory negligence and in pari delicto.
- The trial court granted dismissal; the Court of Appeals reversed, holding an auditor–client relationship may give rise to a fiduciary duty and that the other claims survived dismissal.
- The Supreme Court granted discretionary review to decide whether an independent auditor owes a fiduciary duty to its audit client and whether the other claims were barred by contributory negligence or in pari delicto.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether an independent auditor owes a fiduciary duty as a matter of law to its audit client | Auditor’s GAAS-based engagement and promises to detect errors/fraud created special confidence and domination, giving rise to fiduciary duty | Auditor’s role is governed by GAAS and duties to third parties/public; no categorical fiduciary relationship exists as a matter of law | No fiduciary duty as a matter of law; fiduciary duty may arise in fact but the complaint’s allegations do not establish one — breach of fiduciary claim dismissed |
| Whether the engagement terms pled established a fiduciary relationship in fact | Engagement letters promising to identify errors/fraud and recommend improvements show special confidence and reliance | Those promises merely restated GAAS obligations and did not constitute additional services creating domination or loyalty | Allegations tracked GAAS duties and did not show additional services or domination; no fiduciary relationship in fact |
| Whether plaintiff’s other claims (breach of contract, negligence, malpractice) are barred by contributory negligence | Plaintiff’s complaint does not establish that manager’s failure to file was negligent or imputed to the credit union; defenses premature on pleadings | Affirmative defenses of contributory negligence and in pari delicto bar plaintiff’s claims | Court divided; the Supreme Court left the Court of Appeals’ reversal intact on these claims (issue undecided by this Court; decision stands without precedential value) |
Key Cases Cited
- Dalton v. Camp, 353 N.C. 647 (definition and requirement of fiduciary relationship)
- Green v. Freeman, 367 N.C. 136 (fiduciary relationship: special confidence and duties)
- Dallaire v. Bank of Am., N.A., 367 N.C. 363 (fiduciary duty characterized by heightened trust and acting in best interests)
- Raritan River Steel Co. v. Cherry, Bekaert & Holland, 322 N.C. 200 (auditor duty to avoid negligent misrepresentations to intended beneficiaries)
- HAJMM Co. v. House of Raeford Farms, Inc., 328 N.C. 578 (existence of fiduciary relationship depends on circumstances)
- Abbitt v. Gregory, 201 N.C. 577 (fiduciary arises where confidence reposed and resulting domination/influence)
- United States v. Arthur Young & Co., 465 U.S. 805 (auditors assume public responsibilities transcending client employment relationship)