Author Archives: George Sanderson

Can a Lender’s Failure to Provide a Promised Refinancing be an Unfair or Deceptive Trade Practice?

When a borrower asserts an alleged violation of N.C. Gen. Stat. § 75-1.1 against a lender, the claim often presents a familiar fact pattern. Frequently, the borrower alleges that the lender promised to refinance or modify the borrower’s loan and then broke that promise, causing injury to the borrower.

A borrower who asserts this type of claim usually faces several substantial hurdles to avoid dismissal or summary judgment. In Hetzel v. JPMorgan Chase Bank, N.A., however, a borrower’s 75-1.1 claim based on a bank’s alleged broken promise to refinance a real estate loan survived summary judgment.

This post analyzes Hetzel. For reasons that I’ll explain, the somewhat unique fact pattern led to a decision by United States District Court Judge Terrence W. Boyle that may have limited application in future cases.

The bank pays off the wrong mortgage

In Hetzel, the borrower owned multiple coastal properties. Those properties secured multiple loans to JPMorgan Chase Bank. The borrower started the process of refinancing the loans with another lender. The borrower thought that he could obtain better loan terms with the other lender.

The borrower successfully obtained a refinancing commitment from the new lender on one of the properties. The new lender sent the refinancing proceeds to JPMorgan to pay off JPMorgan’s mortgage on that property. Unfortunately, JPMorgan inadvertently paid off the mortgage on one of the borrower’s other properties, and not on the refinanced property.

Compounding the mistake, the borrower stopped making payments to JPMorgan for the mortgage on the refinanced property. The borrower claimed that he was unaware that the first mortgage had not been paid off.

Once he stopped paying on the first mortgage, the loan fell into arrears, and JPMorgan started foreclosure proceedings. JPMorgan also reported the borrower’s payment delinquencies to credit bureaus.

Eventually, the borrower discovered the payoff error and demanded that JPMorgan fix the problem.  The bank worked to correct the misapplication of the proceeds. But the borrower alleged that JPMorgan further promised that it would refinance the borrower’s other properties should the other lender be unwilling to proceed with refinancing because of the error (i.e. because of the loan delinquencies JPMorgan erroneously reported).

Ultimately, neither JPMorgan nor the other lender refinanced the remaining loans. The borrower disputed his ongoing payment obligations to JPMorgan, and JPMorgan commenced foreclosure proceedings. 

Among other defendants, the borrower then sued JPMorgan. The borrower asserted multiple claims against the bank, including a 75-1.1 claim based on JPMorgan’s alleged promises to the borrower that it would refinance the borrower’s remaining properties but failed to do so. The borrower alleged that JPMorgan’s promises were false and made “in an unfair attempt to delay plaintiff from seeking legal redress.” 

The borrower filed his suit in Carteret County Superior Court. With the consent of the other defendants, JPMorgan removed the case to the United States District Court for the Eastern District of North Carolina.

The borrower’s 75-1.1 claim survives summary judgment

After several rounds of motion practice and amended pleadings, JPMorgan ended up as the lone defendant at the close of discovery. JPMorgan filed a motion for summary judgment. Judge Boyle granted summary judgment to JPMorgan on certain claims, but denied summary judgment as to the 75-1.1 claim.

Significantly, Judge Boyle found that the bank did not have a contractual obligation to modify the loans.  Judge Boyle opined that there cannot be a 75-1.1 claim based on a failure to modify a loan or contract if the lender has no obligation to make the modification.

The court allowed the 75-1.1 claim to go forward, however, based on JPMorgan’s alleged promises that the borrower would receive a loan modification. Judge Boyle indicated that there was “just enough” evidence to allow the 75-1.1 claim to make it to the jury.

Although it is notable that the court here allowed the 75-1.1 claim to survive, this case presents a slightly different fact pattern than in other cases. The borrower here was able to raise a genuine issue of material fact that JPMorgan was responsible for the borrower being unable to refinance or modify the loans in the first place. In allowing the borrower’s negligence claim to also survive summary judgment, Judge Boyle determined that the lender’s alleged misapplication of the loan proceeds could give rise to a duty of care that the lender would not otherwise owe to the borrower.

It also does not appear that the parties briefed whether the borrower had actually or reasonably relied on any statement by the bank. As we have pointed out in previous posts, the North Carolina Supreme Court has held that both actual and reasonable reliance are necessary if a 75-1.1 claim is premised on misrepresentations.

In Hetzel, the court found that the lender may have owed a duty to the borrower that would not normally arise in the debtor/creditor context. It will be left to other courts to explore the significance of that special duty on a lender’s liability under 75-1.1—the parties in Hetzel settled at mediation before trial.

Author: George Sanderson


Can a company violate Chapter 75 simply by investigating potential trademark infringement?

When a company investigates potential trademark infringement, what tactics can the company use without the investigation running afoul of North Carolina’s Unfair and Deceptive Trade Practices Act?

The Fourth Circuit Court of Appeals recently explored this question in Exclaim Marketing, LLC v. DirecTV, LLC.

Tracking down a potential infringer

DirecTV provides television service via satellite (DirecTV is now affiliated with AT&T).  DirecTV sometimes contracts with retailers to sell DirecTV’s service.  DirecTV’s agreements with retailers generally prohibit retailers from contracting with third parties that DirecTV has not authorized.

Exclaim Marketing provides customer leads. Exclaim owns telephone numbers throughout the United States.  Consumers may place orders for different types of goods and services through those numbers. Although not authorized by DirecTV, Exclaim contracted to provide leads to several DirecTV retailers.

To generate leads, Exclaim would buy listings for its phone numbers in conventional telephone directories (Yellow Pages ads, for instance). Exclaim’s listings did not identify the company by name. Instead, Exclaim’s listings usually only included a generic term such as “satellite television.” Exclaim did include “DirecTV,” or a variant, in a small number of its listings.

When a prospective satellite TV customer called one of Exclaim’s listings, the call would be routed to Exclaim’s call center. A telemarketer would determine if the customer was calling about satellite TV and, if so, forward the potential customer’s call to a satellite TV retailer.

In time, DirecTV discovered Exclaim’s directory listings. DirecTV viewed the inclusion of its name in some listings as a trademark violation, as well as a potential violation of its retailer contracts. DirecTV launched an investigation to determine who owned the listings.

As part of its search, DirecTV’s investigators called the numbers in Exclaim’s directory listings. On occasion, DirecTV’s investigators would provide false names to Exclaim’s telemarketers.  The telemarketers sometimes hung up if an investigator identified as working for DirecTV.

DirecTV ultimately identified Exclaim as the owner of the infringing listings. When confronted, Exclaim removed some of the listings, but DirecTV continued to discover infringing listings for several years after identifying Exclaim.  In turn, DirecTV continued to place calls, to both infringing and “generic” listings, over several years.  DirecTV continued to make calls both to investigate whether Exclaim was continuing to infringe and whether DirecTV’s retailers were still continuing to conduct business with Exclaim.

Exclaim brings to trial claims that DirecTV’s calls were unfair and deceptive

Exclaim ultimately sued DirecTV. Exclaim alleged that DirecTV wrongfully threatened retailers to induce them to not work with Exclaim. Exclaim further contended that DirecTV’s ongoing phoning of Exclaim’s listings was malicious and not for any legitimate business purpose. 

Exclaim asserted claims for tortious interference of contract and defamation. Exclaim also asserted that DirecTV’s multiple calls over repeated years violated N.C. Gen. Stat. § 75-1.1. Exclaim alleged that DirecTV’s actions were both unfair and deceptive.  Although not designated as such, Exclaim 75-1.1’s claims sounded both in direct unfairness and deception.

DirecTV counterclaimed for trademark infringement under the Lanham Act.

Although its other claims were dismissed, Exclaim’s 75-1.1 claim survived both a 12(b)(6) motion and a motion for summary judgment

Three years after Exclaim filed the original complaint, Exclaim’s 75-1.1 claim and DirecTV’s Lanham Act claim went to trial in the United States District Court for the Eastern District of North Carolina. At trial, Exclaim alleged that multiple practices by DirecTV violated 75-1.1. The jury, however, expressly found that DirecTV engaged in only one wrongful practice:  DirecTV telephoned Exclaim’s “call center over 175 times over a six year period, at times using false names.”  The jury found that DirecTV’s conduct caused proximate harm to Exclaim and that Exclaim was entitled to $760,000.00 in damages (before trebling).

The jury also found that Exclaim had infringed on DirecTV’s trademark and awarded DIRECTV $25,000.00.

Post-verdict, DirecTV moved for judgment as a matter of law. United States District Court Judge Louise Flanagan granted the motion, ruling that the jury’s finding did not support a 75-1.1 claim. She concluded that the phone calls to Exclaim were not “in or affecting commerce,” nor did they constitute an unfair or a deceptive practice.

On the other hand, the district court increased the jury’s award to DirecTV to $610,560.00 for disgorgement of Exclaim’s profits from the infringing activity.

The Fourth Circuit Affirms on Appeal

Exclaim appealed Judge Flanagan’s decision.  In a per curiam opinion after oral argument, the Fourth Circuit wholly affirmed the district court.

With respect to Exclaim’s 75-1.1 claim, the appellate court analyzed whether DirecTV’s call history met the definition of either an unfair or deceptive practice.

First, the court analyzed whether DirecTV’s conduct was statutorily unfair. As to the direct-unfairness claim, the court broadly defined an unfair practice to include conduct (1) that “a court of equity would consider it to be unfair” and (2) that “offends established public policy as well as when the practice is immoral, unethical, oppressive, unscrupulous, or substantially injurious to consumers.”

The court expressed doubt that the placing of telephone calls to publicly disseminated telephone listings could ever be an unfair practice. The court also opined that DirecTV’s ongoing infringement investigation was a “legitimate business purpose” for placing calls. The court determined that DirecTV’s actions were fair especially because DirecTV continued to find infringing listings for years after Exclaim was initially identified as the source.

The court also did not consider DirecTV’s conduct to be deceptive. The court did not find inherent deception in the jury’s finding that DirecTV placed the calls to Exclaim.  The court was not troubled even though DirecTV’s investigators falsely posed as potential customers and gave false names to Exclaim’s telemarketers.

DirecTV’s investigators testified that Exclaim’s telemarketers would stonewall or hang up on them if they identified themselves as DirecTV’s agents.  The court found DirecTV’s use of false names was therefore “intrinsically linked” to investigating the source of infringing listings.

Because the Fourth Circuit found that Exclaim’s claim failed to meet the definition of either an unfair or a deceptive practice, the court declined to address the district court’s determination that DirecTV’s conduct was not in or affecting commerce.

A win, but a cautionary tale

The Fourth Circuit’s decision appears to broadly protect a company’s investigatory activities linked to a “legitimate” business purpose, but section 75-1.1 still serves potentially to chill such activity.  In DirecTV’s case, even though the company prevailed on appeal, 75-1.1 liability remained a constant threat throughout years of litigation. Likewise, even in the course of broadly insulating DirecTV’s conduct, the Fourth Circuit reiterated a broad standard for direct unfairness claims. A company that undertakes an investigation into the activities of another company should remain aware of these risks.

Note: Ellis & Winters represents DirecTV, LLC, but did not represent the company in the Exclaim case.

Author: George Sanderson

Can a Lender Sue a Borrower for Unfair and Deceptive Trade Practices?

In most lending-related cases under N.C. Gen. Stat. § 75-1.1, a borrower sues a lender. Borrowers often pursue these claims to resist their repayment obligations or to seek leverage against foreclosure.

Makadia v. Continental Waste Management departs from this pattern. In Makadia, it was a lender who sued a borrower under section 75-1.1. The lender claimed that the borrower lied about the intended use of loan proceeds. This claim survived a motion to dismiss.

The borrower fails to use the loan proceeds as intended

In Makadia, an individual lender advanced $1 million to a corporate borrower. The CEO of the borrower signed a promissory note to memorialize the loan. 

The sole purpose of this loan was to allow the borrower to acquire two waste-management plants. Under the loan terms, the waste-management plants were supposed to serve as the collateral for the loan—that is, once the borrower actually acquired the plants.

After signing the promissory note, the borrower’s CEO told the lender that the acquisitions of the plants had closed. This statement turned out to be untrue. When the lender learned that the acquisitions had not closed, it demanded immediate repayment of the loan. The borrower refused.

The lender then sued the borrower and its CEO in the U.S. District Court for the Eastern District of North Carolina. The lender’s claims included breach of contract, conversion, and violations of section 75-1.1.

The lender’s claims survive dismissal

The borrower and the CEO moved to dismiss the lender’s conversion claim and 75-1.1 claim. The district court (Senior District Judge James Fox) denied the motion.

On the 75-1.1 claim, the borrower and the CEO argued that the lender’s allegations stated only a breach-of-contract claim and that the lender had not alleged substantial aggravating circumstances.

The court, however, saw two types of aggravating circumstances in this fact pattern: (1) deceptive conduct, and (2) conversion, an intentional tort.

The district court’s decision raises intriguing questions:

  • Why does conversion state a “substantial aggravating circumstance,” given that some decisions hold that conversion alone falls short of a per se violation of section 75-1.1?
  • What other types of conversion, if any, would count as substantial aggravating circumstances? For instance, would a borrower’s intentional misuse of collateral support a 75-1.1 claim? That conduct, unlike the conduct in Makadia, probably would not qualify as deceptive.
  • Speaking of deception, what other types of misrepresentations by borrowers would show substantial aggravating circumstances? Would lies on a loan application or a related financial statement qualify? How about lies about the condition or value of collateral?

The answers to these questions will have significant effects on lending-related litigation. Allowing a lender to seek treble damages from a borrower, after all, would dramatically shift leverage in the lender’s favor. It will be interesting to see whether Makadia starts a trend of “borrower liability” claims under section

Author: George Sanderson