Loan Officer Error in Describing Lien Position Not Breach of Fiduciary Duty

In a June 12, 2014 decision, the North Carolina Supreme Court held a loan officer’s erroneous statements about the priority of another lien (1) did not give rise to a breach of fiduciary duty claim, and (2) did not give rise to a negligent misrepresentation claim unless the borrowers shows they made a reasonable inquiry into the statements.

In doing so, the Supreme Court rejected borrower arguments 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. *** this  “new  reality”  requires  a  corresponding  evolution  in  the  law  whereby  lenders  should  be  considered  fiduciaries.

 The borrowers in Dallaire v. Bank of America (link to PDF), had filed Chapter 7 bankruptcy. They had 1st and 2nd mortgages on their residence held by BoA and a substantial 3rd  held by BB&T. Although the Dallaires were discharged from personal liability on the loans, the mortgages remained liens on their residence.

In a post-discharge refinance transaction, the loan officer, himself relying on erroneous information and believing the BB&T 3rd was extinguished by the bankruptcy, told the Dallaires the BB&T loan would not be a problem for a new 1st mortgage loan by BoA. The loan closed, paying off only the existing BoA liens, without the error being corrected.

The error was discovered three years later when a friend asked about purchasing the Dallaires’ home. A routine title search showed the BB&T mortgage, now in 1st priority position. In a suit brought by the Dallaires due to diminution in the marketability of their residence by the existence of the BB&T 1st priority lien, the trial court granted BoA summary judgment. The judgment was reversed by the Court of Appeals.

In reversing the Court of Appeals and reinstating the summary judgment order, the Supreme Court rejected the “new reality” argument and reaffirmed existing doctrine that “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.” In addition, a claim for negligent misrepresentation requires “reasonable inquiry into the validity of those statements” or at least a showing an inability to make such an inquiry. According to the NC Supreme Court, no facts were presented by the borrowers in opposing the summary judgment motion.