On December 18, 2015, the North Carolina Supreme Court decided a dispute about whether a lender and appraiser had a legal duty to disclose appraisals to a borrower during the underwriting process. The court ruled in favor of the lender and appraiser, holding that the lender and appraiser owed no legal duty to disclose the appraisals to the borrower.

Shortly before the financial crisis of 2008, the borrowers purchased undeveloped real estate for investment in one of several planned communities in Brunswick County, North Carolina. After the national real estate crisis hit, the borrowers were facing a large loss on their investment and sought to recover against their lender and its appraisers. On March 26, 2010, the borrowers filed this action, asserting eighteen claims against the lender, appraisers, and real estate developer. Borrowers alleged that the defendants defrauded investors by artificially inflating property values through commissioning inflated appraisals and not sharing them with prospective investors.

On June 28, 2010, the lender and appraisers moved to dismiss the complaint for failure to state a claim under Rule 12(b)(6) of the North Carolina Rules of Civil Procedure. On June 27, 2011, the trial court granted the lender’s 12(b)(6) motion to dismiss and, on June 13, 2012, granted the appraisers’ 12(b)(6) motion to dismiss on all claims. On May 16, 2014, the borrowers appealed and the NC Supreme Court granted cert for review before a decision had been issued by the NC Court of Appeals.

The borrowers argued that the lender owed them a legal duty, similar to a fiduciary duty, created either by the general relationship between a lender and its borrower, the duty of good faith and fair dealing or by the Mortgage Lending Act (MLA). The borrowers assert that the lender breached this duty by concealing the appraisal information in a manner that induced the borrowers to take a loan. The borrowers claim the appraisers breached a duty of care owed to the borrower when they prepared faulty appraisals for the bank.

The NC Supreme Court disagreed with the borrowers’ arguments and affirmed the dismissal of claims against the lender and appraisers. The court held that the borrowers’ complaint “reveals an absence of both law and facts necessary to establish that the bank owed a duty to disclose the information that plaintiffs contend was wrongfully admitted.” First, the court noted that a lender’s duties are defined by the loan agreement and do not extend beyond its terms. Dallaire v. Bank of Am., N.A., 367 N.C. 363, 368, 760 S.E.2d 263, 266-67 (2014). Therefore, no duty exists between a lender and borrower unless a duty has been created by contract, or as a result of any other special circumstances. The court found that no duty existed because borrowers had failed to allege any contractual terms or unique circumstances that revealed a duty owed to them by the lender. As to the borrowers’ claim based on the MLA, the court rejected it because the MLA applies to properties purchased for “personal, family, or household use,” and the borrowers merely purchased undeveloped real estate as an investment.

Even if borrowers had succeeded in showing that special circumstances had established a duty, they still would have had to show justifiable reliance on the omission and proximate cause that the lender caused the borrowers’ injury. The court found that the plaintiffs did not allege justifiable reliance because they never asked the lender to see appraisal information during the underwriting process and did not allege they were prevented from making such an inquiry in any way. Since the borrowers did not even ask to see the appraisals, the court found they cannot claim that they justifiably relied upon the appraisals in making the decision to purchase the investment property that subsequently led to financial injury.

The court also found that borrowers failed to allege proximate cause. Considering the borrowers neither saw nor asked to see the appraisals, they cannot allege the appraisals proximately caused them to purchase the investment property. If they did not rely on the appraisals, then they cannot allege that any misrepresentation relating to the appraisals was the proximate cause of the financial injury that resulted from purchasing the failed investment property. In sum, the borrowers failed on their claims because the terms of their contract did not establish a duty, they failed to allege that a duty existed through special circumstances, and they failed to allege that a breach had occurred through justifiable reliance and proximate cause.

Although there is ordinarily no legal duty to disclose between a borrower and lender or appraiser, the court left the door open for a borrower to prevail in a similar lawsuit against a lender or appraiser under different circumstances. As the court stated, “it is possible, at least theoretically, for a particular bank-customer transaction to ‘give rise to a fiduciary [relationship] given the proper circumstances…” Moving forward, a similarly situated borrower could establish that a lender or appraiser owed him a duty to disclose as long as he can prove that both special circumstances had established a fiduciary relationship and that a breach of that duty occurred based on justifiable reliance and proximate cause. That is a high barrier, so it is likely that, in a majority of related situations, a legal duty will not exist between borrowers and lenders or appraisers absent explicit terms in a contractual agreement.