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No Cause of Action in North Carolina for Negligent Underwriting of a Real Estate Loan

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  • September 05, 2014

Today, the North Carolina Court of Appeals issued an opinion holding that no cause of action exists against a lender for negligent underwriting of a real estate loan.  Fazzari v. Infinity Partners, LLC, COA13-1303 (N.C. Ct. App. Aug. 5, 2014).  The decision affirms and strengthens the doctrine that lenders do not generally owe fiduciary duties to their borrowers for acts taken within the normal debtor-creditor relationship.  

The Fazzari suit arose out of the failure of Grandfather Vistas, a real estate development located in Caldwell County, North Carolina.  Starting in 2006, the developers of Grandfather Vistas put in place a land banking program where approximately sixty ten-acre tracts of undeveloped land were sold to investors for $500,000.00 in order to finance the further development of the property.  The developers guaranteed the buyback of each lot for $625,000.00 within one year after purchase.  Once repurchased, the developer intended to subdivide the lots into one-acre retail parcels.

Despite promises of a quick return on their investment, the borrowers soon learned that little of the money raised was actually used to develop Grandfather Vistas and by 2007 all work on the development had ceased.  In December of 2008, seeking to recover their lost investment, a number of the borrowers brought suit in Mecklenburg County Superior Court.  The lawsuit sought recovery from the failed developers as well as from a number of lenders who had been identified by the developers as preferred lenders – First Charter Bank of North Carolina, Wachovia Bank, N.A. and SunTrust Banks, Inc. (the “lenders”).  

The borrowers brought a number of claims against the lenders including a number of negligence-based claims for deficiencies arising out of the appraisal and underwriting processes.  On March 8, 2012, the trial court granted the lenders’ motions for summary judgment as well as granting the lenders other relief, including entering judgment on a number of counterclaims brought against certain borrowers.  

Affirming the order of the trial court, the North Carolina Court of Appeals echoed the recent decision of the North Carolina Supreme Court in Dallaire v. Bank of America, N.A. In that case, the Supreme Court held that lenders do not generally owe any fiduciary duty to borrowers beyond the terms of the loan agreement and that exceptional circumstances would need to exists to give rise to such a duty.  The Court of Appeals found the circumstances in Fazzari “far from being exceptional” and that the lender had no duty to the borrowers with regards to any appraisal or the general underwriting of the loan which was done for the protection of the lender, not the borrowers.  In particular, the Court held: “Simply put, in North Carolina, there is no cause of action for negligent underwriting of loans for the purchase of real estate.”  

The Court of Appeals also specifically rejected the borrowers attempts to rely on the Mortgage Lending Act (“MLA”) as a source of a duty for the borrowers’ negligence-based causes of action.  The MLA applies only to loans for “personal, family or household use.”  The borrowers attempted to rely upon the MLA by asserting that although the lots were purchased as investments, the lenders treated the loans as home loans in order to avoid their own internal underwriting standards.  The Court rejected this argument finding that the lenders’ internal policies and procedures are intended to protect lenders and that such internal designations did not change the loans’ true nature.  

The decision in Fazzari allows lenders to breath a bit easier knowing that despite inconsistencies in the underwriting and appraisal process that these internal functions do not give rise to any special duty by lenders to real-estate investors in North Carolina.  Hopefully, the Fazzari opinion will continue to curtail litigation against lenders based upon an alleged duty owed by lenders to investors.