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The NC Supreme Court recently affirmed the dismissal of a multitude of lender liability claims asserted against BB&T in a quasi-class action by purchasers of undeveloped lots in Brunswick County. In Arnesen et al. v. Rivers Edge Golf Club & Plantation, Inc. et al., No. 375A14, the Supreme Court rejected these claims, which alleged the bank concealed information about its relationship with the developer, the value of the lots, the appraisal process and its underwriting process. Approximately 150 plaintiffs alleged the developer, bank and appraisers participated in a scheme to defraud them by artificially inflating property values in several coastal residential communities in the years preceding the national real estate crisis.

The claims against the bank included: fraud; unjust enrichment; violation of North Carolina’s RICO statute; breach of duty of good faith and fair dealing/negligent supervision; unfair and deceptive trade practices; civil conspiracy; and violation of North Carolina’s Mortgage Lending Act (MLA). The gist of the claims was the plaintiffs would not have purchased these lots but for faulty appraisal information, which the bank should have discovered and disclosed to them. However, the complaint revealed the plaintiffs did not view, receive, order, or inquire about the appraisals before purchasing the property, nor were the contracts they signed to buy the property contingent upon any appraisal or financing. The plaintiffs did not allege BB&T made any direct representations to them nor did they allege they inquired about the appraisals any time before purchasing their “investment properties.” The NC Business Court granted the bank’s Motion to Dismiss by holding it did not owe the plaintiffs a duty to disclose the details of the appraisals or its loan underwriting process and all of the plaintiffs’ claims were premised upon the bank allegedly withholding this information. The trial court further noted the plaintiffs could not have relied upon the appraisals because they were not in existence at the time the plaintiffs signed contracts to buy the lots.

The Supreme Court agreed with the Business Court. It began by reaffirming the principle that no legal duty exists between a debtor and creditor or between a bank’s appraiser and a purchaser. In an ordinary debtor-creditor transaction, the lender’s duties are defined by the loan documents and do not extend beyond those terms. Parties to written instruments are charged with knowledge of the contents and a fiduciary duty does not arise unless one party “in equity and good conscience is bound to act in good faith and with due regard to the interest of the one reposing confidence.” But the law rarely imposes on lenders a duty to put borrowers’ interests ahead of their own. In this case, there were no allegations regarding any special circumstances establishing a fiduciary relationship between BB&T and the plaintiffs.

The court also found the plaintiffs failed to sufficiently allege justifiable reliance upon the alleged faulty appraisals or that their injuries were caused by BB&T. It was undisputed the plaintiffs decided to purchase these investment properties without consulting an appraisal. They did not allege they requested to review the appraisals or inquired into the loan process. The Supreme Court concluded any misrepresentations made during the sales process came from the developer, not the bank. Justice Newby, who wrote the majority opinion, noted reliance is not reasonable “if a Plaintiff fails to make any independent investigation” or fails to demonstrate he was prevented from doing so.

Importantly, the court held the plaintiffs were “investors” and so the Mortgage Lending Act (MLA), found at N.C. Gen. Stat. § 53-243.11, did not apply to these transactions. The MLA applies solely to loans “primarily for personal, family or household use, which are primarily secured by either a mortgage or a deed of trust on residential real property located in North Carolina.” In their complaints, the plaintiffs alleged they purchased the lots as “investments” and because of their “good investment potential.” But with no infrastructure or amenities built, they could hardly have been used for residential purposes. Classifying the plaintiffs as “investors” instead of “buyers” was a critical distinction for the court to make in justifying dismissing the MLA claim. Additionally, BB&T could not have violated the MLA by acting in bad faith when it did not disclose information it did not have, was not asked to provide or was not contractually obligated to produce. Therefore, there was no breach of duty under the MLA, or the duty of good faith and fair dealing.

This case is very helpful for financial institutions because it confirms what duties lenders typically owe their borrowers. As those duties are spelled out in written contracts, plaintiffs face an extremely high pleading threshold in order to survive a Motion to Dismiss. Allegations and claims of duties allegedly owed, but not found in the contract, will not survive a Motion to Dismiss. Further, the court recognized the true nature of the plaintiffs as “investors” and as such, the MLA’s provisions are not applicable in such transactions. Finally, it establishes the need for plaintiffs to actually rely on the questioned information to establish proximate cause.

If you have questions about this case or other cases involving claims against financial institutions, feel free to reach out to Nick Ellis or Caroline Mackie.

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