## Facts

- M. Lee Heath, Jr. was a client of a North Carolina law firm; one firm lawyer handled estate-planning matters for Heath, and another handled Heath’s real-estate matters.
- Francis O. Clarkson, Jr., a firm shareholder/officer, solicited Heath to make short-term “loan” investments promising unusually high returns tied to foreign oil transactions.
- In August 1983, Heath gave Clarkson $25,000 in exchange for Clarkson’s personal promissory note for $50,000; after an extension, Heath was repaid $62,500.
- In fall 1983, Clarkson resigned effective September 30 but remained in the firm’s offices for roughly two months while arranging other office space.
- After the resignation, Clarkson solicited additional funds from Heath: $50,000 for a $100,000 note and later $25,000 for a $75,000 note, both payable December 19, 1983; Clarkson also provided personal letters assuring repayment would not come from illegal sources.
- Clarkson’s repayment checks were dishonored; he later paid Heath $50,000, but $37,500 of that payment was reclaimed in Clarkson’s bankruptcy as a preference.
- Heath sued the firm and its principals, asserting vicarious liability and direct liability theories based on Clarkson’s solicitation and misuse of Heath’s funds.

## Issues

1. Whether the firm was vicariously liable under agency/respondeat superior for Clarkson’s investment scheme as conduct within the scope of employment or with apparent authority.
2. Whether the firm owed Heath a fiduciary duty regarding Clarkson’s private investment solicitations and breached that duty.
3. Whether the firm was negligent for failing to detect or supervise Clarkson’s non-firm investment activities.
4. Whether the firm was liable under the North Carolina Securities Act (Chapter 78A) for Clarkson’s offers/sales or as a statutory seller/control person.

## Decision

- The North Carolina Court of Appeals affirmed the trial court’s directed verdicts for the firm on agency/respondeat superior, breach of fiduciary duty, and Chapter 78A claims.
- The court also affirmed the judgment notwithstanding the verdict for the firm on negligence, holding the evidence did not establish a duty owed by the firm to Heath to detect or supervise Clarkson’s private scheme.
- The court held Clarkson’s transactions with Heath were personal, documented by Clarkson’s individual notes and assurances, and not part of the firm’s legal practice or authorized firm business.

## Legal Principles

- A firm is not vicariously liable for a lawyer’s misconduct when the lawyer acts in a personal capacity outside the scope of employment and outside the ordinary course of the firm’s legal practice, absent authorization or knowledge attributable to the firm.
- A negligence claim against a firm based on another lawyer’s clandestine side dealings requires proof of a specific duty owed by the firm to the plaintiff to detect and supervise those non-firm activities; without such a duty, liability cannot lie as a matter of law.
- A fiduciary-duty theory against a firm requires a firm-level fiduciary relationship tied to the challenged conduct; an attorney’s separate investment promotion to a client does not automatically become firm conduct.
- Securities-law liability under Chapter 78A requires evidence that the defendant firm offered or sold the security (or fits a statutory control-person/seller category); mere association with the individual wrongdoer is insufficient.

## Conclusion

The court held the firm and its principals were not responsible for a former shareholder’s private, off-book investment fraud against a firm client because the scheme was outside the practice of law, not within the scope of employment or firm authority, and the evidence did not establish a firm duty to detect or supervise the conduct or a basis for securities-law liability.


Heath v. Craighill, Rendleman, Ingle & Blythe, P.A., 97 N.C. App. 236, 388 S.E.2d 178 (Ct. App. 1990)