In a case that has implications for all banks in North Carolina, the North Carolina Supreme Court removed a cloud of uncertainty that has remained over the North Carolina banking industry for more than 18 months. The Supreme Court’s decision in Dallaire v. Bank of America reverses the Court of Appeals decision that allowed a borrower’s breach of fiduciary duty claim against Bank of America to proceed to trial.
The plaintiffs in Dallaire filed Chapter 7 bankruptcy in 2005 to relieve personal liability on their debts, including three mortgage liens against their home. These included two liens held by Bank of America and one by BB&T. The bankruptcy relieved the borrowers of personal liability on these debts, but the liens against their home remained valid.
In 2007, the plaintiffs responded to a mailed solicitation from the bank for refinancing home mortgages and went to a local branch to discuss a refinance for their home. The plaintiffs alleged a loan officer at the bank “repeatedly assured them that a new refinancing loan would receive first priority status and advised them to increase the amount of the loan to pay off two car notes.” The plaintiffs disclosed on their loan application that “they had been obligated on a loan which resulted in foreclosure, transfer of title in lieu of foreclosure or judgment,” but they “checked ‘No’ next to the disclosure asking whether they had been declared bankrupt within the past 10 years.”
The bank’s title search, which was conducted by a title agency and not a North Carolina licensed attorney, apparently failed to reveal the BB&T lien. According to the court’s opinion, the title agency employed by the bank “gathered information from Plaintiffs and noted that Plaintiffs advised LSI [the title agency] that the BB&T lien was discharged.”
In 2010, the plaintiffs attempted to sell their home and conducted a title search, which revealed that the BB&T loan held first priority and the new loan with the bank held second priority. The plaintiffs then filed suit against the bank alleging claims for negligent misrepresentation, negligent title search, breach of contract, breach of fiduciary duty, and several statutory violations. The trial court granted summary judgment for the bank on all claims and the plaintiffs appealed.
The Court of Appeals’ opinion affirmed the entry of summary judgment on the plaintiffs’ claim for breach of contract and statutory violations (and found the claim for negligent title search against the bank was abandoned on appeal), but reversed on the claims for breach of fiduciary duty and negligent misrepresentation. The court acknowledged the holding in Branch Banking & Trust Co. v. Thompson that the mere existence of a debtor-creditor relationship between the parties does not create a fiduciary relationship and that an ordinary debtor-creditor relationship generally does not give rise to a special confidence that creates a fiduciary relationship. The court found the allegations in this case, however, rose to a higher level than an ordinary debtor-creditor relationship. The court held:
Here, Plaintiffs argue that special circumstances were present to give rise to a fiduciary relationship where the facts suggest that Defendant advised Plaintiffs that a first priority lien was possible and being provided. Plaintiffs allege that they openly discussed their circumstances with Defendant and that Defendant assured them they could obtain a first priority lien mortgage loan. We find this case distinguishable from Branch Banking & Trust Co. because Plaintiffs did not receive outside advice. Id. When the facts are viewed in the light most favorable to Plaintiffs, we find that there is a question of fact as to whether or not the circumstances of the parties’ interaction prior to signing the loan give rise to a fiduciary relationship and consequently created a fiduciary duty for Defendants.
The Court of Appeals’ holding was a striking departure from prior cases in which North Carolina appellate courts have found a variety of banking relationships did not create a fiduciary relationship arising out of a lending relationship (or present sufficient facts for a jury to decide the issue). Thus, the courts’ opinion – if left undisturbed – had the potential to dramatically expand lenders’ exposure to claims for breach of fiduciary duty in the ordinary debtor-creditor relationship.
The Supreme Court allowed the bank’s petition for discretionary review and the case was briefed and argued in February 2014. Poyner Spruill also submitted an amicus brief on behalf of the North Carolina Bankers Association urging the Supreme Court to reverse the Court of Appeals' decision .
On June 12, 2014, the Supreme Court reversed the Court of Appeals and reaffirmed that “ordinary borrower-lender transactions . . . do not typically give rise to fiduciary duties.” The Supreme Court contrasted the typical borrower-lender relationship with those in which fiduciary relationships are “readily apparent” – i.e., relationships between spouses, attorneys and their clients, trustees and beneficiaries, and partners within a partnership. The court explained that “common to all these relationships is a heightened level of trust and the duty of the fiduciary to act in the best interests of the other party,” and that “ordinary borrower-lender transactions, by contrast, are considered arm’s length.” As the court explained, unlike relationships giving rise to fiduciary duties, the “law does not typically impose upon lenders a duty to put borrowers’ interests ahead of their own.” Further, the court held that while it may be possible, “at least theoretically, for a particular lender-borrower transaction to give rise to a fiduciary relation given the proper circumstances,” the record in Dallaire “provides no basis for concluding that [the borrowers] reposed in the Bank of America loan officer the special confidence required for a fiduciary relation.”
With this opinion, lenders across North Carolina can breathe a sigh of relief. While future plaintiffs will likely seek to distinguish the facts of their case from the facts of Dallaire, the Supreme Court’s decision substantially reduces the extent to which lenders across the state will be exposed to jury trials on claims contending ordinary lender-borrower interactions give rise to fiduciary duties.