Shifting Winds? Two N.C. Courts Uphold Fiduciary Duty Claims Against Banks

by Spilman Thomas & Battle, PLLC
Contact

For the first time ever, North Carolina’s Business Court and Court of Appeals both upheld fiduciary duty claims against banks in late 2012. Debtors frequently employ such claims in an attempt to shift liability for failed projects to their lenders or to pressure lenders to settle problem loans in the wake of the financial downturn. Despite their ubiquity, breach of fiduciary duty claims had proven elusive for borrowers before October 2012. With two victories notched in their belt, however, it is likely that borrowers and their counsel will approach these claims with renewed vigor in 2013 and for the foreseeable future.

I.    Fiduciary Duties in North Carolina
In North Carolina, a fiduciary duty arises when “there has been a special confidence reposed in one who in equity and good conscience is bound to act in good faith and with due regard to the interests of the one reposing confidence.” Curl v. Key, 311 N.C. 259, 264, 316 S.E.2d 272, 275 (1984). In the banking context, however, North Carolina’s courts have held repeatedly that an ordinary debtor-creditor relationship generally does not give rise to such a “special confidence,” and our courts have consistently resisted debtors’ attempts to cast particular facts as showing more than a mere debtor-creditor relationship. See, e.g., Wells Fargo Bank, N.A. v. Vandorn, 2012 NCBC 6 (N.C. Super. Ct. January 17, 2012) (lendees alleged only an ordinary lender-borrower relationship where lender became involved only after lendees had located the lot, formed the intent to purchase, formed a company to purchase, and approached the lender about financing the transaction); Peak Coastal Ventures, LLC v. SunTrust Bank, 2011 NCBC 13 (N.C. Super. Ct. May 5, 2011) (lender’s knowledge of a lendee’s business plan was mere due diligence and insufficient to create a fiduciary relationship); Allran v. Branch Banking and Trust Corp., 2011 NCBC 21 (N.C. Super. Ct. July 6, 2011) (documents produced by lender were industry standard and thus lendee had alleged merely an ordinary debtor-creditor relationship); Branch Banking and Trust Co. v. Thompson, 107 N.C. App. 53, 61, 418 S.E.2d 694, 699 (1992) (lendees failed to allege a fiduciary relationship or reliance where they sought financial advice from private sources). None of these cases, however, went so far as to say that a borrower could never successfully sue a lender for breach of fiduciary duty, and attorneys and banks were left to ponder what set of facts might create the requisite “special relationship.”

II.    WNC Holdings, LLC v. Alliance Bank & Trust Co.
The Business Court first answered this question in October 2012 in WNC Holdings, LLC v. Alliance Bank & Trust Co., 2012 NCBC 50 (N.C. Super. Ct. Oct. 2, 2012). The WNC Holdings case involved a lender’s motion to dismiss a number of claims, including breach of fiduciary duty, brought by its borrower on a failed real estate development. The Business Court denied the lender’s motion to dismiss the fiduciary duty claim, finding that the bank had assumed a dual role as both lender and financial advisor in the development of the property. The second, advisory role gave rise to a special relationship beyond the ordinary debtor-creditor relationship.

As set forth in the debtors’ complaint, the borrower in WNC Holdings sought an acquisition and development loan from the bank for a residential subdivision. In accordance with its underwriting guidelines, the bank contracted with an independent appraiser for an appraisal of the property. The debtors alleged that the bank also had a pro forma financial feasibility statement prepared for the borrowers in order to move the project forward and have the borrowers borrow the development money from the bank. The feasibility statement is typically prepared by a borrower, not the lender.

Thereafter, the bank extended credit for the acquisition and development of the property. Later, the bank evidently developed reason to question the initial appraisal value and ordered a new appraisal. The new appraisal reflected a value of approximately one third of the original appraised value. Based on the new appraisal, the bank demanded the borrower sign renewal notes and supply additional collateral for the loan. The bank allegedly did not notify the borrower of the overvaluation in the first appraisal or the reduced value in the second appraisal, but the loan officer assured the borrower that the project was still financially feasible and drew up another financial pro forma on the borrower’s behalf.

The project was evidently unsuccessful, and the borrower and guarantors ultimately sued the bank on a host of claims related to the allegedly misleading appraisal and representations. At the heart of their claims, the debtors alleged that the initial appraisal overvalued the property, that they relied on the bank’s diligence in reviewing the appraisal and the bank’s alleged misrepresentations, and that the debtors would not have borrowed from the bank had they known of the errors in the first appraisal. At the time of the lawsuit, the borrowers were current on their payments and had not defaulted under the loan documents.

The bank moved to dismiss a number of the debtors’ claims, including their claim for alleged breach of fiduciary duty. The bank argued that the documentation filed on behalf of the loan, the inspections of the project, and any financial advice rendered were part of the bank’s due diligence in a normal arms-length transaction. In contrast, the debtors argued that their allegations detailed more than a mere debtor-creditor relationship because the bank acted as a financial and development advisor and completed financial feasibility pro forma statements on behalf of the borrower. Taking the allegations of the complaint as true, as it was required to do at the motion to dismiss stage, the Business Court agreed with the debtors.

The court noted that the debtors contended the bank acted not just as a lender, but also as a financial and development advisor for the project. The court focused on the fact that the bank had reviewed and suggested changes to the borrower’s property development agreements, performed inspections of the property and development, and completed financial feasibility pro forma statements that are traditionally completed by the debtor. Those allegations, the court said, distinguished the WNC Holdings case from other cases and alleged conduct that exceeded mere creditor knowledge of the debtor’s business plan and were sufficient to establish a fiduciary relationship. Because the debtors alleged the bank breached this relationship by failing to disclose the defective appraisal, the court ruled that the debtors had adequately stated a claim in the complaint for breach of fiduciary duty and denied the bank’s motion to dismiss that claim.

III.    Dallaire v. Bank of America, N.A.
Just two months later, the North Carolina Court of Appeals reached a similar result on different facts. In Dallaire v. Bank of America, N.A., No. COA12-626 (N.C. Ct. App. Dec. 18, 2012) (slip op.), the Court of Appeals overturned summary judgment in favor of the bank for alleged breach of fiduciary duty arising from the lender’s representations in a mortgage refinance.

The borrowers’ home in Dallaire was subject to three liens, a first and second deed of trust in favor of the defendant bank, and a third deed of trust held by another lender. In an earlier Chapter 7 bankruptcy, the borrowers had been relieved from personal liability on the three mortgage liens. Later, the borrowers responded to a solicitation from the defendant bank for a mortgage refinance. The borrowers alleged they fully informed the bank’s agent of the three liens and their bankruptcy, and the agent repeatedly assured them that a new refinancing loan would have first priority status and, further, that they should increase the amount of the loan to pay off two cars as well. The bank ordered a “title search” from a subsidiary that showed the three liens, and analysis by a title agency reported that the liens were discharged. Notably, the bank did not have an attorney review the information, but instead handled the full refinance process itself.

When the borrowers later attempted to sell their home, their title search revealed that what had been the third priority lien of the other lender now had first priority status, followed by the new refinance loan. The borrowers sued the bank for a host of claims arising from its alleged misrepresentation, including a claim for breach of fiduciary duty.

The trial court granted summary judgment for the bank, no doubt relying on the bevy of prior cases refusing to find a fiduciary duty on the part of banks. Without citing the recent WNC Holdings opinion, the Court of Appeals reversed the trial court’s decision. The borrowers argued on appeal that special circumstances were present to give rise to a fiduciary duty where the facts suggested the bank advised the borrowers that a first priority lien was possible and being provided. The borrowers alleged they openly discussed their circumstances with the bank and were assured they could obtain a first priority loan. Those facts distinguished the Dallaire case from others in which the borrower had relied on outside counsel and advice in addition to the representations of the lender. As a result, the Court of Appeals held that there was a fact question as to whether the parties’ interaction before signing the loan gave rise to a fiduciary relationship. Specifically, the court held that a question of fact existed as to whether the bank sought to give legal advice to the borrowers as to loan priority and stated that, when a bank provides a customer with a service beyond that inherent in the creditor-debtor relationship, it must do so reasonably and with care. The court remanded the case to superior court for trial.
 
IV.    Takeaways for North Carolina Lenders
While the recent opinions in WNC Holdings and Dallaire appear to be the first reported cases in North Carolina upholding a borrower’s claim against a bank for alleged breach of fiduciary duty, the results in those cases are not especially groundbreaking. Most attorneys who follow this issue have assumed from earlier cases that such a claim would be upheld given the right set of facts. And in that regard, it is helpful that both courts took pains to distinguish the facts of earlier opinions and reiterate the general rule that an ordinary debtor-creditor relationship does not create a fiduciary relationship.

WNC Holdings and Dallaire are important, however, as a reminder to banks and their counsel of the importance of walking the line between extending credit on the one hand and what can, on the other hand, be characterized as offering services outside the traditional debtor-creditor relationship. It is now clear the courts will not permit banks to venture into offering financial or legal advice without creating a fiduciary relationship. While that rule is easily stated, it is not always so black and white in practice. Proper training to educate loan officers and other front line staff is key. Loan officers at community banks, in particular, must successfully juggle close relationships, intimate knowledge of a borrower’s business, and the desire to close a deal with the bank’s interest in avoiding the type of “special relationship” that can establish a fiduciary duty. It is important that loan officers avoid trying to actively “sell” the development or business deal to the client and that they instead focus on meeting underwriting requirements and extending credit once the borrower has made its own business decision to move forward.

Bank employees must also be circumspect in their representations and in providing materials to borrowers. While providing appraisals, environmental studies or other due diligence documents to a borrower have not, by themselves, been held to create a fiduciary duty, providing those documents in a situation where it is clear the borrower is relying on them is problematic. And it goes without saying that bankers should now be extremely hesitant to offer opinions on loan priority, to complete financial feasibility statements for borrowers, or to perform other analysis of the borrower’s business plan other than for the bank’s own internal purposes. Bank employees should instruct all borrowers to consult legal counsel or outside advisors with questions.

The recent success in WNC Holdings and Dallaire will undoubtedly embolden borrowers and their counsel to assert fiduciary duty claims against banks with renewed vigor. These claims are highly factual and can be difficult to assess without expensive discovery and briefing at the summary judgment stage. Banks should be proactive in addressing this challenge by taking time today to educate their employees and update policies to mitigate the risk.
For more information, please contact:

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Spilman Thomas & Battle, PLLC | Attorney Advertising

Written by:

Spilman Thomas & Battle, PLLC
Contact
more
less

Spilman Thomas & Battle, PLLC on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.