We have been keeping an eye out for lawsuits where the plaintiffs attempted to lump lenders in with developers for liability purposes and we are glad to report the North Carolina Court of Appeals has refuted such an attempt.  Since the 2008 downturn in the economy, some plaintiffs’ lawyers have viewed lenders as “deep pocket defendants” and so they’ve been sued in cases filed by purchasers of lots in subdivisions that were never developed as advertised.  While the buyers’ main complaint is against the developer, because they have often gone into bankruptcy or simply disappeared, buyers and their attorneys have sued lenders, closing attorneys, and appraisers in an effort to regain the loss of value their lots suffered.  These buyers contend their lots lost value solely because infrastructure and amenities were not completed in these developments and generally act as if the global economy hummed along as usual. 

While the claims lenders commonly have asserted against them range from them and developers being in implied partnerships to joint ventures to being co-conspirators, the North Carolina Court of Appeals recently addressed a buyer’s attempt to classify his lender as a “Developer” under the Interstate Land Sales Act, commonly referred to as “ILSA.”  And, while a novel theory, the Court in Pignatiello v. Synovus Financial Corp. d/b/a National Bank of South Carolina and Seven Falls, LLC (NC Court of Appeals, March 18, 2014) (“NBSC #2) dismissed this claim.  This is in contrast to a ruling in Synovus v. Coleman (W.D.N.C., August 15, 2012) (“NBSC #1”) that was reported by David Dreifus in an earlier Poyner Spruill alert.  While both cases involved the same bank, the National Bank of South Carolina and the same development, Seven Falls Golf and River Club, the rulings came at different stages of the case, which explains why there were two different results.  

In NBSC #2, the plaintiff purchased a lot in a proposed development in Henderson County, NC known as “Seven Falls Golf and River Club” for $650,000.  The National Bank of South Carolina (“NBSC”) financed the purchase of this lot.  More importantly (to the plaintiff, at least), NBSC also financed the acquisition and development of the project through a $25,000,000 loan to Seven Falls, LLC.  The A&D Loan was made in 2006 and the plaintiff purchased his lot in November, 2007.  Unfortunately, little or no development to the 1600 acres Seven Falls project occurred and the plaintiff filed his lawsuit in 2010 against both Seven Falls and NBSC claiming they were both responsible for this failure.

The plaintiff alleged NBSC lent its name to sales efforts; its employees solicited buyers; it jointly hosted marketing events in 2007 and 2008 with Seven Falls; which, the plaintiff alleged led consumers to believe the sales agents and loan officers were all working for the same company.  Again, the plaintiff asserted claims for breach of contract, breach of fiduciary duty, fraud, negligence, Unfair and Deceptive Trade Practices and conspiracy.  Somewhat unique was the claim NBSC was a “Developer” under ILSA.

The plaintiff in NBSC #1 made similar allegations, but the court was confronted with assessing those allegations in a motion to dismiss from the bank and at such an early stage in the litigation, the court had to accept all plausible factual allegations as true.  The federal court in NBSC #1 explained that banks may make lending decisions and engage in business practices, which may lead to short-term profits, even if they are likely to lead to long-term losses and that such allegations were plausible – at least to the judge in NBSC #1.  Fortunately, the NC Court of Appeals in NBSC #2 considered a summary judgment motion, not a motion to dismiss, and the plaintiff failed to develop facts to support his allegations and his case was dismissed.

As David explained in his earlier alert, one of ILSA’s main purposes is to prevent “developers” from engaging in fraudulent or deceptive marketing practices.  ILSA places express disclosure requirements on developers that are designed to protect purchasers by apprising them of information they need to make informed decisions about buying real estate.  The bulk of these representations are contained in a Property Report that must be provided to purchasers.  The question is are lenders to lot buyers “developers” under ILSA so that they have to give similar warnings?  The answer is “No.”

ILSA defines “Developer” as a person who, directly or indirectly, sells, offers to sell, or advertises for sale lots in a subdivision and that an “agent’ is a person who represents or acts on behalf of a Developer.  15 U.S.C. § 1701(5)(6).  So, if a lender is involved with selling lots,  advertising lots for sale, or acting in concert with a Developer, it will have to provide the disclosures ILSA mandates. 

In NBSC #2, the plaintiff’s evidence was that he only attended one marketing event and he believed that was after he actually purchased his lot.  While NBSC acknowledged it loaned money to the plaintiff and also to Seven Falls, and also participated in on-site marketing events paid for and hosted exclusively by Seven Falls, its purpose in doing this was simply to inform potential buyers that it was a financial source available to provide lot loans.

The appellate court’s affirmation of summary judgment for NBSC was correct in its recognition that NBSC was not a “Developer” under ILSA as neither it nor its employees were involved with selling the lots in any manner or advertising the lots for sale in any manner.  And, simply participating in a developer’s marketing events – just like homebuilders, insurance agents and real estate agents do – does not make a lender an “agent” for the developer.

Certainly, financial institutions are allowed to advertise their lending capabilities to potential buyers in newly established subdivisions, but their participation in making those customers aware of their financial products should not and does not equate to the lender being a “Developer” under ILSA or create a joint venture or any other type of joint project with the Developer.  While this ruling is unpublished, it continues to recognize this distinction between Developers and their lenders.  It also lends credibility to the argument NBSC made in NBSC #1 that such allegations of a bank intentionally lending money on lots it knows are overvalued are not plausible and that such cases should be dismissed without the necessity of engaging in costly discovery.