The Dallaire purchased their home in 1998 for $173,660.00. They filed a Chapter 7 bankruptcy in the Middle District of North Carolina, case number 05-53774, on October 13, 2005, and at that time had three mortgages against the property- the first and second mortgages were both held by Bank of America, in the amounts of $138,900 and $25,000, respectively, and a lien for a business loan to BB&T, in the amount of $241,449.37. The Dallaires received a discharge and did not reaffirm any of the three obligations. A year later (at the tail end of the mortgage lending frenzy), the Dallaires refinanced the Bank of America loans, after Bank of America, following the advise of its title agency, mistakenly believed that the BB&T lien had been extinguished. The refinancing satisfied the original two Bank of America mortgages, but unintentionally, and contrary to what the Dallaires alleged they were told by Bank of America would occur, moved the BB&T lien into first priority, with the new Bank of America mortgage taking junior status. Upon discovery, the Dallaires brought suit against Bank of America alleging alleged negligent title search, negligent misrepresentation, breach of contract, and breach of fiduciary duty, arguing that because under the modern loan origination and securitization process lenders exercise such total control over the process that such lenders should be considered fiduciaries of the borrowers.
The North Carolina Supreme Court rejected this argument, holding that “[o]rdinary 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). While the Court held that its theoretically possible for a fiduciary relationship to arise between a borrower and lender, the mere assertion by the loan officer that the new Bank of America loan would hold first priority was insufficient. The claim of negligent misrepresentation by the Dallaires also failed as they showed no evidence that they had conducted their own “reasonable inquiry regarding the loan officer’s alleged misstatements” or were denied the opportunity for such inquiry.
While, of course, the North Carolina Supreme Court cannot give advisory opinions on when actions by a lender would be sufficient to give rise to a fiduciary duty, it is both disappointing and unhelpful that this opinion does little more than rule on the single fact in this case, viz. the promise by loan officer, rather than providing any criteria or factors that would be useful in future cases.
Several other issues that do not appear to have been raised or addressed in this case. Firstly, while the Dallaires appear to have asserted that the statement by the loan officer for Bank of America was a “quintessentially legal question”, nothing addresses whether this advise constituted the unauthorized practice of law. As it involved not only lien priority, but also questions of bankruptcy, it seems that this advise was improper and potentially illegal. I have sent a copy of this opinion to the North Carolina State Bar, seeking guidance on whether this advise constitutes the unauthorized practice of law.
Secondly, the refinance with Bank of America is potentially an improper reaffirmation following the 2005 Chapter 7 bankruptcy. Pursuant to 11 U.S.C. § 524(c)(1), a reaffirmation agreement must be made before a discharge is granted. As the Dallaires did not appear to have received any new money from Bank of America in the 2007 refinancing, but instead only satisfaction of the first and second mortgages, this seems to be an unenforceable reaffirmation. See Cherry v. Arendall (In re Cherry), 247 B.R. 176 (Bankr. E.D. Va. 2000).
Lastly, even if enforceable, the value for the Dallaires’ home appears to only be $193,000.00. With a first lien to BB&T of more that $240,000, it would appear that the Dallaires could file a Chapter 13 case and strip-off the Bank of America mortgage.
For a copy of the opinion, please see: