Happy New Year!
We begin 2016 by studying a new decision on a familiar issue: the degree of reliance required in a claim under N.C. Gen. Stat. § 75-1.1. North Carolina law now holds that a plaintiff who makes a 75-1.1 claim based on a misrepresentation must show actual and reasonable reliance on the misrepresentation.
Last month, the North Carolina Supreme Court issued another important decision in this area. In Arnesen v. Rivers Edge Golf Club & Planation, Inc., the court extended the reliance requirement to omissions and indirect misrepresentations. Justice Paul Newby—the author of the court’s landmark opinion in Bumpers—wrote the majority opinion in Arnesen as well.
Arnesen affirms the dismissal of unfair-trade-practice claims against a bank and appraisers engaged by the bank. To help the bank decide whether to make loans to purchasers of residential lots, the bank sought appraisals of some of those lots. Purchasers of the lots sued the bank and the appraisers, alleging that the appraisals were inflated, that the faulty appraisals advanced a failed development, and that the plaintiffs lost money on their lots.
The Supreme Court decided, however, that the bank and the appraisers had no duty to tell the purchasers about any defects in the appraisals. The court also held that the lot purchasers did not adequately allege reliance against either the bank or the appraisers.
The Plaintiffs’ Coastal Investments Go Underwater
The plaintiffs in Arnesen bought multiple undeveloped lots in a coastal development. The developer who sold the lots to the plaintiffs indirectly referred the plaintiffs to BB&T to finance the lot purchases.
BB&T obtained a limited number of appraisals that valued the individual lots for internal underwriting purposes. Out of the many lots that the plaintiffs purchased, for example, BB&T had only two of them appraised.
After the housing market collapsed in 2008, the development failed. The plaintiffs, whose lots were now worth far less than the original purchase price, sued the developers, BB&T, and the appraisers.
In their claims against the bank and the appraisers, the plaintiffs alleged that the appraisals were faulty. They said that the appraisers arrived at valuations by comparing the plaintiffs’ lots with other properties that the same developer had previously sold, allegedly at inflated prices. This circular appraisal method, the plaintiffs said, systematically inflated the appraised values of the lots that the plaintiffs later bought.
Regarding BB&T, the plaintiffs claimed that the bank had a duty to discover that the appraisals were faulty and had a duty to inform the plaintiffs of these defects.
Notably, the plaintiffs did not allege that either the bank or the appraisers ever made any direct misrepresentation to them. Nor did they allege that they knew anything about—or even asked about—the appraisals before they bought their lots. The sales contracts for the lots did not include any financing contingencies or appraisal contingencies. BB&T apparently used the appraisals only for internal evaluation of its collateral on the loans.
Against the bank, the plaintiffs alleged fraud, breach of duty of good faith, and violations of section 75-1.1. Against the appraisers, the plaintiffs asserted negligence, negligent misrepresentation, and violations of section 75-1.1.
The North Carolina Business Court dismissed all of the claims against the bank and the appraisers. The North Carolina Supreme Court, acting on its own motion, certified the case for direct discretionary review.
The Majority Opinion
The Supreme Court majority, in an opinion by Justice Newby, affirmed the dismissal of all claims against the bank and the appraisers.
Regarding the bank, the court first decided that all of the claims against the bank were based on an alleged failure to discover and disclose defects in the appraisals. The majority thus concluded that, for the claims against the bank (including the 75-1.1 claims) to survive, the bank had to have a duty to discover the appraisal defects and disclose them to the borrowers.
This theory failed for lack of any duty to disclose. In an earlier opinion by Justice Newby, the court had held that a lender-borrower relationship ordinarily does not impose any duties beyond the duties spelled out in the loan agreement, although additional duties could arise under special circumstances. In Arnesen, the court saw no special circumstances that would disrupt the baseline assumption of no duty. The court held that the bank had no duty to disclose the alleged defects in the appraisals—or even a duty to find those defects.
The court went on to affirm the dismissal of the 75-1.1 claim on an important additional basis: the plaintiffs had not adequately pleaded actual reliance or reasonable reliance, as Bumpers required them to do. The complaint never alleged that the plaintiffs relied on the appraisals when they decided to buy their lots. Indeed, the complaint revealed that the plaintiffs made their decision without even consulting an appraisal. The court affirmed the dismissal of the 75-1.1 claims against the bank on this additional basis.
Regarding the appraisers, the court likewise relied on the lack of a duty to disclose. In rejecting such a duty, the court noted the following points:
- BB&T, not the plaintiffs, was the appraisers’ client.
- The plaintiffs never communicated with the appraisers.
- The plaintiffs never reviewed the appraisals.
- The plaintiffs did not even allege that BB&T intended to use the appraisals to influence them.
The claims against the appraisers likewise failed for lack of reliance. The court found it pivotal that the “complaint fails to establish that the plaintiffs relied on actual appraisals.” The plaintiffs instead alleged that they relied on BB&T’s decision to close on the loans, and thus relied implicitly on the appraisals that BB&T had reviewed. The court, however, held that this indirect reliance does not qualify as reasonable reliance—or even actual reliance.
Justice Hudson, joined by Justice Beasley, dissented from the court’s decision. The dissenters would have allowed the plaintiffs’ 75-1.1 claims to survive against both the bank and the appraisers.
Regarding the bank, Justice Hudson believed that the complaint alleged enough to give the bank a duty to disclose. Her analysis of the claims against the bank did not specifically address reliance.
Regarding the appraisers, Justice Hudson opined that North Carolina law allows actual reliance on indirect misrepresentations. She reasoned that parties who buy houses “commonly understand that unless the house appraises for the contract price (at least), the lender will not approve a loan to finance the purchase.” She viewed this understanding as a valid form of reliance on an appraisal.
Justice Edmunds concurred in the majority opinion in part, but also concurred in part of the dissent. He would have allowed the 75-1.1 claims to survive against the appraisers, but not against the bank.
The Bottom Line
Even if you’re only a casual reader of our blog, you probably sense a pattern here. Arnesen is one of many recent decisions—including Bumpers, Topshelf, and Solum—that raise the bar for deception-based 75-1.1 claims.
In Arnesen, the Supreme Court has now extended the requirements of actual and reasonable reliance to 75-1.1 claims that allege deceptive omissions. In addition, the decision holds that at least one type of indirect reliance does not qualify as actual or reasonable reliance.
What will be the next domino to fall in this area? We welcome your thoughts in the comments.
Author: George Sanderson