In what may be a first for a North Carolina appellate court, the North Carolina Court of Appeals has reversed the entry of summary judgment for a lender on a borrower’s breach of fiduciary claim.  In Dallaire v. Bank of America, N.A., issued December 18, 2012, the Court of Appeals unanimously reversed the entry of summary judgment in favor of Bank of America ("BOA") on the borrower’s breach of fiduciary claim and remanded the case for trial. 

The plaintiffs had filed a Chapter 7 bankruptcy in 2005 to relieve their personal liability on their debts, including three mortgage liens against their home.  These included two liens held by BOA and one held 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 BOA for refinancing home mortgages and went to a local branch to discuss a refinance for their home.  According to the opinion, the plaintiffs alleged that a BOA loan officer “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.”  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[.]’  However, Plaintiffs checked ‘No’ next to the disclosure asking whether they had ‘been declared bankrupt within the past 10 years[.]’” 

BOA’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 opinion, the title agency employed by BOA “gathered information from Plaintiffs and noted that Plaintiffs advised LSI [the title agency] that the BB&T lien was discharged.” 

In 2010, plaintiffs attempted to sell their home and conducted a title search, which revealed that the BB&T loan held first priority and the new BOA loan held second priority.  Plaintiffs then filed suit against BOA 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 BOA on all claims and plaintiffs appealed.

The Court of Appeals affirmed the entry of summary judgment on plaintiffs’ claim for breach of contract and statutory violations (and found that the claim for negligent title search against BOA had been 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, 107 N.C. App. 53, (1992), 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 that 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 BranchBanking & 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."

This holding is a striking departure from prior cases in which North Carolina appellate courts have found that 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).  Although not cited by the Court of Appeals, this decision is similar to a recent decision from the North Carolina Business Court that illustrates the risks a lender faces when it assumes a role in a transaction beyond that of a traditional creditor.  In WNC Holdings, LLC et al. v. Alliance Bank & Trust, et al.,  the Business Court denied a lender’s motion to dismiss a developer’s breach of fiduciary duty claim because the lender allegedly acted as a “financial and development advisor” to the developer by completing “financial feasibility pro forma statements” on behalf of the developer, reviewing property development agreements and making suggested changes, and performing inspections of the property and development. 

After concluding a breach of fiduciary duty claim was sufficiently supported by the allegations, the Business Court also allowed to stand the developer’s claims of negligence, fraud by misrepresentation, fraud by concealment, constructive fraud, breach of the covenant of good faith and fair dealing, unfair and deceptive trade practices, and punitive damages.  Those claims were based on allegations that the lender, as a fiduciary of the borrower, had an obligation to tell, but failed to tell the developer that the initial appraisal of the property was defective, and allegations that the lender misled the borrower into believing the property needed to be reappraised because of the economic downturn rather than because of defects in the first appraisal.  The Court allowed these claims despite the fact the appraisal at issue stated it was conducted solely for the lender’s benefit and a number of earlier decisions in which the courts have held that lenders generally have no legal duty to disclose information about appraisals to a borrower.   The Business Court’s basis for distinguishing those earlier opinions appears to be its conclusion that the lender had a fiduciary relationship with the borrower, which created duties to the borrower exceeding those specified in the loan documents.

Both Dallaire and WNC Holdings indicate that the North Carolina courts appear to be  more willing than they have been in the past to find fiduciary relationships in a lender-borrower relationship.  The North Carolina Supreme Court has yet to weigh in on this issue.  Even if the Supreme Court elects to review the Dallaire decision, it will be a long time before there is clarity on this issue.  In the meantime, lenders should exercise extreme caution in dealing with borrowers lest the courts decide that the conduct has created a “special relationship of confidence” that gives rise to fiduciary duties to the borrower.