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Loan officer’s statements about lien priority in home mortgage transaction do not give rise to borrower’s claims for breach of fiduciary duty and negligent misrepresentation against lender

The North Carolina Supreme Court recently analyzed whether a loan officer owes a borrower a fiduciary duty in a home mortgage transaction.  Dallaire v. Bank of Am., ___N.C.___, 747 S.E.2d 535 (2013), decided June 12, 2014, No. 51PA13.  Jacques and Fernande Dallaire (“Borrowers”) purchased a home as their primary residence in 1998.  Seven years later they filed Chapter 7 bankruptcy due to unrelated business debts.  At the time, their home was encumbered by three liens: a first and second priority deed of trust in favor of Bank of America (“BOA) to secure a mortgage note and a home equity line of credit; and a third priority lien in favor of Branch Banking & Trust (“BB&T”) to secure a business loan.  The bankruptcy court entered an order discharging the Borrowers’’ personal liability on all three loans, but the liens remained attached to their residence.

A year after their bankruptcy discharge, the Borrowers received an advertisement from BOA to refinance their mortgage.  They responded with an application, and checked “no” on the box asking if they had recently declared bankruptcy.  According to the Borrowers, however, they did in fact disclose their bankruptcy filing to a BOA loan officer, who repeatedly assured them that the bankruptcy and the BB&T mortgage would not be a problem and the new BOA loan would be secured by a first priority deed of trust against their home.

BOA, following its routine procedures, retained a title company to prepare a title report.  The title report disclosed the BB&T lien, prompting BOA to contract with another title company to perform curative title work.  As part of that work, the title company contacted the Borrowers and obtained their bankruptcy petition and discharge order.   The title company then advised BOA that the loan was cleared to close, apparently based on the mistaken belief that the BB&T lien on the Borrowers’ residence had been extinguished completely in bankruptcy. 

BOA proceeded to loan the Borrowers’ $166,000 in exchange for a deed of trust on their home.  The loan agreement required the Borrowers to “promptly discharge” any liens which BOA determine to have priority over its loan, provided BOA give the Borrowers notice of any such lien.  The Borrowers used the loan proceeds to pay off the first and second priority deeds of trust held by BOA, as well as two car loans, while still reducing their monthly payments.  However, BOA did not inform Borrowers of the BB&T lien, and that lien was never paid or release.  As a result, following the refinancing, the BB&T lien attained first priority status on the Borrowers’ residence, while the new BOA loan, on which the Borrowers were personally liable, took a second priority position.

Three years later, when the Borrowers were considering a potential sale of their house, a new title search discovered that the BB&T lien still existed and was senior to the BOA lien.  Upon learning of the status of the BOA lien, the Borrowers filed a lawsuit in state court in North Carolina against BOA and the original title company involved in their refinancing.  The Borrowers alleged the junior status of the BOA lien decreased the marketability of the residence and subjected them to increased personal liability.  The Borrowers alleged, among other claims, claims for breach of fiduciary duty and negligent misrepresentation.  Defendants filed a motion for summary judgment, arguing that no fiduciary relationship existed and the transaction never rose beyond a traditional creditor debtor encounter.  With respect to Borrowers’ negligent misrepresentation claims, the defendants argued Borrowers failed to prove they made reasonable inquiry into BOA’s lien priority statements.  The trial court agreed, granting defendants’ motions.  On appeal, the Appellate court found special circumstances of the transaction may have given rise to a fiduciary relationship.  BOA then sought discretionary review from the North Carolina Supreme Court, which was allowed.

The North Carolina Supreme Court explained that fiduciary relationships generally arise when there has been a special confidence reposed in one requiring them to act in good faith and with due regard for the other.  Fiduciary relationships are characterized by confidence reposed on one side, and resulting domination and influence on the other.   Ordinary borrower-lender transactions, in contrast, are generally considered arm’s length and do not typically give rise to fiduciary duties.  As the Dallaire court explained, “…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.” 

Applying these principles, the court held that a loan officer’s mere assertion that Borrowers could obtain a first priority loan is insufficient to transform the parties’ relationship from arm’s length to fiduciary.   Accordingly, the Dallaire court held the trial court properly granted defendants summary judgment on the Borrowers’ fiduciary duty claim. 

As for Borrowers’ negligent misrepresentation claim, the Dallaire court explained that North Carolina law requires the Borrowers prove they made reasonable inquiry regarding the loan officer’s alleged misstatements of lien priority.  In other words, the plaintiff must make an independent inquiry into the alleged misrepresentations.  The court found that the Borrowers presented no evidence they made any independent inquiry into the priority of the liens during the refinancing or that they sought outside advice concerning same.   The Borrowers also presented no evidence that BOA denied them the opportunity to investigate the loan officer’s initial assertions.  Accordingly, the Dallaire court determined the trial court properly granted summary judgment to the defendants on the Borrower’s negligent misrepresentation claim.