Dallaire v. Bank of America, N.A.

IN THE SUPREME COURT OF NORTH CAROLINA
No. 51PA13
FILED 12 JUNE 2014
JACQUES A. DALLAIRE and wife, FERNANDE DALLAIRE
v.
BANK OF AMERICA, N.A.; HOMEFOCUS SERVICES, LLC; and LANDSAFE
SERVICES, LLC
On discretionary review pursuant to N.C.G.S. § 7A-31 of a unanimous
decision of the Court of Appeals, ___ N.C. App. ___, 738 S.E.2d 731 (2012), affirming
in part and reversing and remanding in part an order of summary judgment
entered on 14 February 2012 by Judge W. David Lee in Superior Court, Cabarrus
County. Heard in the Supreme Court on 17 February 2014.
Ferguson, Scarbrough, Hayes, Hawkins & DeMay, P.A., by John F.
Scarbrough and James E. Scarbrough, for plaintiff-appellees.
McGuireWoods, LLP, by Robert A. Muckenfuss, for defendant-appellant Bank
of America, N.A.
J.L. Pottenger, Jr. for Jerome N. Frank Legal Services Organization Mortgage
Foreclosure Clinic, amicus curiae.
Poyner Spruill LLP, by Edwin M. Speas, Jr., Andrew H. Erteschik, and Lynn
C. Percival IV, for North Carolina Bankers Association, amicus curiae.
Laura E. Collins for University of North Carolina School of Law Consumer
Financial Transactions Clinic, amicus curiae.
NEWBY, Justice.
Dallaire v. Bank of Am.
Opinion of the Court
In this case we consider whether a loan officer’s statements about lien
priority in a home mortgage transaction support a borrower’s claims for breach of
fiduciary duty and negligent misrepresentation against the lender. Generally, the
home loan process is regarded as an arm’s length transaction between parties of
equal bargaining power and, absent exceptional circumstances, will not give rise to
a fiduciary duty. Because a loan officer’s initial discussion of lien priority in the
context of an ordinary home mortgage transaction is not an exceptional
circumstance, it does not create a fiduciary duty. In addition, a borrower cannot
establish a claim for negligent misrepresentation based on a loan officer’s
statements about lien priority if the borrower fails to make reasonable inquiry into
the validity of those statements. Because no fiduciary duty existed and plaintiffs
did not forecast evidence that they made reasonable inquiry, the trial court correctly
granted summary judgment for the lender on both claims. Accordingly, we reverse
the decision of the Court of Appeals.
Jacques and Fernande Dallaire purchased a home as their primary residence
in 1998 for $173,660. Seven years later the Dallaires filed Chapter 7 bankruptcy
stemming from unrelated business debts. At that time the Dallaires’ home was
encumbered by three liens. Bank of America held a first priority deed of trust on a
mortgage note for $138,900 and a second priority home equity line deed of trust for
$25,000. Branch Banking & Trust (BB&T) held a third priority lien securing a
business loan in the amount of $241,449.37. The bankruptcy court’s order
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Opinion of the Court
discharged the Dallaires’ personal liability on all three liens, but the liens remained
attached to their home. In re Dallaire, Ch. 7 Case No. 05-53774 (M.D.N.C. Jan. 25,
2006).
A year after their bankruptcy discharge, the Dallaires received an
advertisement in the mail from Bank of America offering home mortgage
refinancing services. In response, the Dallaires submitted a loan application, each
checking the box indicating “No” when asked if they had declared bankruptcy
within the past ten years. According to Mr. Dallaire, however, at the time of the
loan application, he disclosed the bankruptcy to a Bank of America loan officer who
repeatedly assured Mr. Dallaire “the bankruptcy and BB&T mortgage would not be
a problem” and that “the new [Bank of America] loan would be secured by a first
lien mortgage against our home.”
In accordance with its routine procedures, Bank of America engaged
HomeFocus Services, LLC (HomeFocus)1 to prepare a title report for Bank of
America’s use. HomeFocus discovered the BB&T lien, prompting Bank of America
to contract with LSI Title Agency (LSI) to perform curative title work. As part of
that work, an LSI representative spoke with Mr. Dallaire and obtained from him
copies of the couple’s bankruptcy petition and discharge order. LSI advised Bank of
America that the loan was cleared to close, apparently based on the mistaken belief
HomeFocus Services, LLC is now known as LandSafe Services, LLC. For
1
consistency, we will use the name of the LLC at the time of the events at issue here.
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Opinion of the Court
that the BB&T lien on the Dallaires’ home had been extinguished completely in
bankruptcy.
Bank of America loaned the Dallaires $166,000 in exchange for a deed of
trust on their home. Under the terms of the loan agreement, the Dallaires were
required to “promptly discharge” any liens which Bank of America determined to
have priority over the loan at issue, provided that Bank of America, in its
discretion, notified the Dallaires of any such lien. The Dallaires used the loan
proceeds to pay off the home’s first and second priority liens held by Bank of
America, as well as two car loans, all the while reducing their overall monthly
payments. Bank of America did not inform the Dallaires of the BB&T lien, and that
lien was neither paid off nor subject to a subordination agreement. Consequently,
the refinancing resulted in the BB&T lien attaining first priority status on the
house, while the new Bank of America loan, which now carried with it personal
liability for the Dallaires, took a second lien position. This was not the outcome
desired by the Dallaires or Bank of America, as both parties anticipated the new
lien would have first priority. Three years after the refinancing, a family friend of
the Dallaires expressed interest in purchasing the Dallaires’ home. This prompted
the Dallaires to contact their bankruptcy attorney who, after conducting a title
search, discovered that the BB&T lien was senior to the Bank of America lien.
Upon learning of the status of the Bank of America lien, the Dallaires filed a
complaint in Superior Court, Cabarrus County, against Bank of America and
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Dallaire v. Bank of Am.
Opinion of the Court
Homefocus. According to the Dallaires, the junior status of Bank of America’s lien
substantially decreased the marketability and value of their home and exposed
them to increased personal liability. The Dallaires’ complaint alleged, in relevant
part, negligent title search, negligent misrepresentation, breach of contract, and
breach of fiduciary duty. Defendants moved for summary judgment on all claims.
Regarding the Dallaires’ fiduciary duty claim, defendants argued that no fiduciary
relationship existed and that the transaction never rose to anything more than a
routine encounter between creditor and debtor. As to the Dallaires’ negligent
misrepresentation claim, defendants insisted the Dallaires failed to demonstrate
they had made reasonable inquiry into Bank of America’s lien priority statements.
The trial court granted defendants’ motion for summary judgment on all claims,
and the Dallaires appealed.
At the Court of Appeals the Dallaires argued, inter alia, that the traditional
arm’s length view of borrower-lender relationships does not comport with the
modern loan origination and securitization process in which lenders exercise total
control over the process and borrowers put complete trust in the lenders. According
to the Dallaires, this “new reality” requires a corresponding evolution in the law
whereby lenders should be considered fiduciaries. As for their negligent
misrepresentation claim, the Dallaires contended that Bank of America did not use
reasonable care in determining the lien’s priority.
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Dallaire v. Bank of Am.
Opinion of the Court
Concerning the Dallaires’ breach of fiduciary duty claim, the Court of Appeals
found 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 Defendant.” Dallaire v. Bank of Am., ___
N.C. App. ___, ___, 738 S.E.2d 731, 735 (2012). The Court of Appeals reasoned that
Bank of America’s alleged assurance of a first priority lien on the Dallaires’ new
mortgage loan was an act beyond the scope of a normal debtor-creditor relationship.
Id. at ___ n.5, 738 S.E.2d at 735 n.5. When taken in the light most favorable to the
Dallaires, the Court of Appeals concluded such actions constituted circumstances
sufficient to establish a fiduciary relationship and thus, summary judgment was
inappropriate. Consistent with its fiduciary duty holding, the Court of Appeals also
remanded the Dallaires’ negligent misrepresentation claim “to determine, if a duty
existed, whether Defendant negligently misrepresented the priority the loan would
receive.” Id. at ___, 738 S.E.2d at 736. The Court of Appeals found no merit in the
Dallaires’ arguments regarding their other claims.
Bank of America sought discretionary review, which we allowed. Dallaire v.
Bank of Am., ___ N.C. ___, 747 S.E.2d 535 (2013). Summary judgment is
appropriate when “the pleadings, depositions, answers to interrogatories, and
admissions on file, together with the affidavits, if any, show that there is no genuine
issue as to any material fact and that any party is entitled to a judgment as a
matter of law.” N.C.G.S. § 1A-1, Rule 56(c) (2013). We review de novo an order
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Opinion of the Court
granting summary judgment. Howerton v. Arai Helmet, Ltd., 358 N.C. 440, 470,
597 S.E.2d 674, 693 (2004) (citation omitted).
Though difficult to define in precise terms, a fiduciary relationship is
generally described as arising 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.” Green v. Freeman, 367 N.C.
136, 141, 749 S.E.2d 262, 268 (2013) (quoting Dalton v. Camp, 353 N.C. 647, 651,
548 S.E.2d 704, 707 (2001)) (quotation marks omitted); see also Meinhard v.
Salmon, 249 N.Y. 458, 464, 164 N.E. 545, 546 (1928) (describing fiduciaries as being
held to a standard “stricter than the morals of the market place” and adding that
“[n]ot honesty alone, but the punctilio of an honor the most sensitive, is the
standard of behavior”). Fiduciary relationships are characterized by “confidence
reposed on one side, and resulting domination and influence on the other.” Dalton,
353 N.C. at 651, 548 S.E.2d at 708 (quoting Abbitt v. Gregory, 201 N.C. 577, 598,
160 S.E. 896, 906 (1931)) (emphasis and quotation marks omitted). These
characteristics of a fiduciary relationship are readily apparent, for example, in the
relationship of spouses, Eubanks v. Eubanks, 273 N.C. 189, 195, 159 S.E.2d 562,
567 (1968) (“The relationship between husband and wife is the most confidential of
all relationships . . . .” (citation omitted)), attorney and client, Fox v. Wilson, 85
N.C. App. 292, 299, 354 S.E.2d 737, 742 (1987) (emphasizing the trust and
confidence inherent in the attorney-client relationship), and trustee and beneficiary,
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Wachovia Bank & Trust Co. v. Johnston, 269 N.C. 701, 711, 153 S.E.2d 449, 457
(1967) (recognizing the fundamental duty of a trustee “to maintain complete loyalty
to the interests of” his beneficiary), and between partners to a partnership, Casey v.
Grantham, 239 N.C. 121, 124-25, 79 S.E.2d 735, 738 (1954) (acknowledging
partners’ duty to act in “utmost good faith” in their dealings with one another).
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.
Ordinary borrower-lender transactions, by contrast, are considered arm’s
length and do not typically give rise to fiduciary duties. Sec. Nat’l Bank of
Greensboro v. Educators Mut. Life Ins. Co., 265 N.C. 86, 95, 143 S.E.2d 270, 276
(1965) (“There was no fiduciary relationship; the relation was that of debtor and
creditor.”); see also Branch Banking & Trust Co. v. Thompson, 107 N.C. App. 53, 61,
418 S.E.2d 694, 699 (The “ ‘mere existence of a debtor-creditor relationship between
[the parties does] not create a fiduciary relationship.’ ” (alteration in original)
(citations omitted)), disc. rev. denied, 332 N.C. 482, 421 S.E.2d 350 (1992). In other
words, the law does not typically impose upon lenders a duty to put borrowers’
interests ahead of their own. Rather, borrowers and lenders are generally bound
only by the terms of their contract and the Uniform Commercial Code. Thompson,
107 N.C. App. at 61, 418 S.E.2d at 699; see also Camp v. Leonard, 133 N.C. App.
554, 560, 515 S.E.2d 909, 913 (1999) (citing and applying previous Court of Appeals
cases holding that “a lender is only obligated to perform those duties expressly
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provided for in the loan agreement to which it is a party”). Nonetheless, because a
fiduciary relationship may exist “under a variety of circumstances,” Abbitt, 201 N.C.
at 598, 160 S.E. at 906, it is possible, at least theoretically, for a particular bank-
customer transaction to “give rise to a fiduciary relation given the proper
circumstances.” Thompson, 107 N.C. App. at 61, 418 S.E.2d at 699 (citation
omitted).
Those circumstances are not present in the case at hand. A loan officer’s
mere assertion that the Dallaires “could obtain a first priority lien mortgage loan,”
Dallaire, ___ N.C. App. at ___, 738 S.E.2d at 735, is insufficient to take the parties’
relationship out of the borrower-lender context or transform it from arm’s length to
fiduciary. When taken in the light most favorable to the Dallaires, the record
provides no basis for concluding that they reposed in the Bank of America loan
officer the special confidence required for a fiduciary relationship. See Green, 367
N.C. at 141, 749 S.E.2d at 268; see also Thompson, 107 N.C. App. at 61, 418 S.E.2d
at 699 (“[A]n ordinary debtor-creditor relationship generally does not give rise to
such a ‘special confidence’ . . . .”). Thus, the trial court did not err in granting
summary judgment for Bank of America on the Dallaires’ breach of fiduciary duty
claim.
The Dallaires next contend that there was sufficient evidence to create an
issue of material fact regarding their claim for negligent misrepresentation. They
assert that at the time of their application the Bank of America loan officer
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repeatedly assured them the new loan would be secured by a first lien mortgage.
The Dallaires stress that determining the effect of a bankruptcy on primary
residence liens is a complex task, and that Bank of America was negligent in
“relying on non-lawyers” to answer “this quintessentially legal question.” According
to the Dallaires, they reasonably relied on this negligently prepared information,
resulting in substantial harm to their net worth.
“The tort of negligent misrepresentation occurs when a party justifiably relies
to his detriment on information prepared without reasonable care by one who owed
the relying party a duty of care.” Raritan River Steel Co. v. Cherry, Bekaert &
Holland, 322 N.C. 200, 206, 367 S.E.2d 609, 612 (1988) (citations omitted). A party
cannot establish justified reliance on an alleged misrepresentation if the party fails
to make reasonable inquiry regarding the alleged statement. Pinney v. State Farm
Mut. Ins. Co., 146 N.C. App. 248, 256, 552 S.E.2d 186, 192 (2001) (“It has also been
held that when a party relying on a ‘misleading representation could have
discovered the truth upon inquiry, the complaint must allege that he was denied the
opportunity to investigate or that he could not have learned the true facts by
exercise of reasonable diligence.’ ” (citation omitted)), disc. rev. denied, 356 N.C.
438, 572 S.E.2d 788 (2002). Whether a party’s reliance is justified is generally a
question for the jury, except in instances in which “ ‘the facts are so clear as to
permit only one conclusion.’ ” Marcus Bros. Textiles, Inc. v. Price Waterhouse, LLP,
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350 N.C. 214, 225, 513 S.E.2d 320, 327 (1999) (quoting Restatement (Second) of
Torts § 552 cmt. e (1977)) (emphasis omitted).
Assuming arguendo that Bank of America owed a duty to the Dallaires
beyond the terms of the loan agreement, the Dallaires have produced no evidence
suggesting they made reasonable inquiry regarding the loan officer’s alleged
misstatements of lien priority. See, e.g., State Props., LLC v. Ray, 155 N.C. App. 65,
73, 574 S.E.2d 180, 186 (2002) (“Reliance is not reasonable if a plaintiff fails to
make any independent investigation . . . .” (citing Calloway v. Wyatt, 246 N.C. 129,
97 S.E.2d 881 (1957))), disc. rev. denied, 356 N.C. 694, 577 S.E.2d 889 (2003);
Simms v. Prudential Life Ins. Co. of Am., 140 N.C. App. 529, 533, 537 S.E.2d 237,
240 (2000) (When “the purchaser has full opportunity to make pertinent inquiries
but fails to do so through no artifice or inducement of the seller, an action in
[negligent misrepresentation] will not lie.” (alteration in original) (citations and
quotation marks omitted)), disc. rev. denied, 353 N.C. 381, 547 S.E.2d 18 (2001). As
the Dallaires themselves have acknowledged, determining the effects of a previous
bankruptcy on a home’s liens is complicated. Yet, there is no indication the couple
made pertinent inquiries or sought outside advice about the liens in 2007 as, for
example, they did in 2010 when preparing to sell their home. The Dallaires have
also failed to offer evidence that Bank of America denied them the opportunity to
investigate the loan officer’s initial assertions. See, e.g., Oberlin Capital, L.P. v.
Slavin, 147 N.C. App. 52, 60, 554 S.E.2d 840, 846-47 (2001) (affirming the trial
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court’s dismissal of a party’s negligent misrepresentation claim because the plaintiff
failed to allege it was denied the opportunity to investigate). Because the Dallaires
have put forth no evidence that they made inquiry or were prevented from doing so,
they have failed to demonstrate the justified reliance necessary to support their
negligent misrepresentation claim. Thus, the trial court did not err in granting
summary judgment for Bank of America on the Dallaires’ negligent
misrepresentation claim.
Under the facts of this case, the Dallaires’ home loan refinancing with Bank
of America was an arm’s length transaction and did not give rise to a claim for
breach of fiduciary duty. In addition, the Dallaires failed to demonstrate justified
reliance on Bank of America’s alleged misstatements in support of their negligent
misrepresentation claim. The Court of Appeals erred in overturning the trial
court’s order granting summary judgment on both claims. Accordingly, we reverse
the decision of the Court of Appeals.
REVERSED.
Justice BEASLEY did not participate in the consideration or decision of this
case.
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