Dreamstreet Investments, Inc. v. MidCountry Bank


PUBLISHED AUTHORED OPINION filed. Originating case number: 1:14-cv-00521-CCE-JEP. [999977919]. [15-2104]

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Appeal: 15-2104 Doc: 34 Filed: 11/30/2016 Pg: 1 of 15 PUBLISHED UNITED STATES COURT OF APPEALS FOR THE FOURTH CIRCUIT No. 15-2104 DREAMSTREET INVESTMENTS, INC., d/b/a DS Builders, a North Carolina Corporation, Plaintiff - Appellant, v. MIDCOUNTRY BANK, a Federal Savings Bank, Defendant - Appellee. Appeal from the United States District Court for the Middle District of North Carolina, at Greensboro. Catherine C. Eagles, District Judge. (1:14-cv-00521-CCE-JEP) Argued: October 25, 2016 Decided: November 30, 2016 Before WILKINSON, KING, and HARRIS, Circuit Judges. Affirmed by published opinion. Judge Harris wrote the opinion, in which Judge Wilkinson and Judge King joined. ARGUED: Rachel Marie Stevens, DREAMSTREET INVESTMENTS, INC., Raleigh, North Carolina, for Appellant. Robert Eli Levin, HAYWOOD, DENNY & MILLER, L.L.P., Durham, North Carolina, for Appellee. ON BRIEF: Matthew Ivan Van Horn, LAW OFFICE OF MATTHEW I. VAN HORN, PLLC, Raleigh, North Carolina, for Appellant. Appeal: 15-2104 Doc: 34 Filed: 11/30/2016 Pg: 2 of 15 PAMELA HARRIS, Circuit Judge: This case arises from a “seller holdback” agreement between Dreamstreet Investments, Inc., which was selling a vacant lot for home construction, and MidCountry Bank, which was financing the lot’s purchase by a third party. of the retained purchase by price owed MidCountry, to Under the agreement, part Dreamstreet pending completion instead would of home the be and subject to certain conditions. On June 16, 2009, Dreamstreet contacted MidCountry, challenging the propriety of the seller holdback agreement and threatening to sue. Over four years later, Dreamstreet made good on its threat. In a complaint filed on June 28, 2013, Dreamstreet alleged that MidCountry fraudulently induced it to enter into the seller holdback agreement, in violation of North Carolina’s Unfair and Deceptive Trade Practices Act (“UDTPA”). A subsequent amendment added a claim under the common-law doctrine of constructive fraud. The district court granted summary judgment to MidCountry. Dreamstreet’s UDTPA claim, the court held, was barred by the applicable four-year statute of limitations. And on the undisputed record facts, the court concluded, Dreamstreet could not establish the necessary elements of a constructive fraud claim. We agree, and for the reasons given below, we affirm the district court’s decision. 2 Appeal: 15-2104 Doc: 34 Filed: 11/30/2016 Pg: 3 of 15 I. A. At issue commercial this entities: corporation; agreement in and are case an Dreamstreet, MidCountry, not is a agreement a real contested. bank. What is between estate The investment terms disputed two of is that how the agreement came to be, and whether MidCountry has lived up to its obligations to Dreamstreet. 1 The case began when Jason Pittman, through his company Dreamstreet Investments, entered into a purchasing agreement to sell an unimproved lot to Carl Ingraham for $115,000. Ingraham hoped to build a home on the property, and to fund his purchase, he applied for an owner-builder loan from MidCountry. An owner- builder loan would allow Ingraham to borrow the purchase price of the lot, and then, acting as his own general contractor, to make additional draws on the remaining loan amount to fund the construction of his home. Under required to MidCountry’s make a underwriting down-payment qualify for the loan. of standards, Ingraham approximately $43,000 was to But Ingraham was unable to meet this 1 On review of a grant of summary judgment to MidCountry, we view the facts in the light most favorable to Dreamstreet, as the non-moving party. See Henry v. Purnell, 652 F.3d 524, 531 (4th Cir. 2011) (en banc). 3 Appeal: 15-2104 Doc: 34 Filed: 11/30/2016 Pg: 4 of 15 requirement, and so Dreamstreet and MidCountry entered into the seller holdback agreement (the “Agreement”) at issue here. Under the Agreement, Dreamstreet would forgo immediate receipt of $43,200 of the purchase price of the lot. would be retained by MidCountry, That money instead ensuring – according to MidCountry – that there would be sufficient funds to complete construction of Ingraham’s home. Upon completion of the home, the money would be released to Dreamstreet. Additional conditions of the Agreement were memorialized in an email sent and signed by Pittman on June 12, 2008, which the parties agree establishes the terms of their agreement. Under those terms, the $43,200 would not be disbursed to Dreamstreet if Ingraham defaulted on on his his MidCountry home. loan or Specifically, failed the to complete construction email stated: “I [Dreamstreet] understand that the only reason the holdback would not be available was if [Ingraham] was in default or unable to complete construction on the home and at that point MidCountry would use those construction on the home.” After sending the remaining funds to complete J.A. 80. June 12 email, Pittman contacted his attorney, his banker, and a real estate appraiser to discuss the seller holdback agreement because it did not “sound right” to him. J.A. 195. Pittman concluded that he would complete the transaction and sell the Dreamstreet lot to Ingraham only if 4 Appeal: 15-2104 Doc: 34 Ingraham Filed: 11/30/2016 provided him with Pg: 5 of 15 a promissory note to cover holdback, secured by a deed of trust on the property. the On June 19, 2008, Ingraham and Dreamstreet executed a promissory note for $49,450, secured by a deed of trust, and closed on the sale of the lot. A year later, shortly before the promissory note was due and after several unsuccessful attempts to contact MidCountry, Dreamstreet sent a lengthy email to MidCountry demanding immediate return of what it now viewed as the improper $43,200 holdback. According to the June 16, 2009 email, Pittman had consulted with his attorney, and it was their view that the holdback actually had “nothing to d[o]” with ensuring the availability of funds for Ingraham’s construction project, and “never should have been held back in the first place.” J.A. 86. Pittman North Carolina lawsuit against Banking promised to Commission MidCountry: “[I] report and have MidCountry also to already to file paid my the a attorney $1,000 to initiate this process,” and “[w]e will be sending out complaints via certified mail on the 26th.” Id. For over four years, Dreamstreet failed to follow through on its threat. with During that time, Ingraham defaulted on his loan MidCountry. On February 25, 2010, MidCountry notified Ingraham that his mortgage loan had come due on September 19, 2009; that his failure to make payments on the loan in December 5 Appeal: 15-2104 Doc: 34 Filed: 11/30/2016 Pg: 6 of 15 2009 and January and February 2010 had put him in default; and that MidCountry At around the intended same to time, commence on foreclosure December 10, proceedings. 2009, the county inspection department certified the construction on Ingraham’s land as compliant with building and zoning regulations. 2 March 30, Although 2012, MidCountry Dreamstreet’s foreclosed promissory note on And on Ingraham’s against home. Ingraham was secured by a deed of trust on the property, it appears that Dreamstreet did not assert any security interest in connection with the foreclosure. B. Dreamstreet MidCountry on finally June 28, filed 2013. 3 the promised Alleging suit that against MidCountry fraudulently induced it to enter into the Agreement and never intended claims to under release North the $43,200 Carolinaʹs holdback, Unfair Dreamstreet and Deceptive raised Trade 2 Whether the Certificate of Compliance received by Ingraham demonstrated completion of Ingraham’s home for purposes of the Agreement is disputed by the parties. We may assume for purposes of this appeal that the home was completed on December 10, 2009. 3 Dreamstreet originally filed suit in North Carolina state court against Carl Ingraham and his wife, as well as MidCountry. After Dreamstreet voluntarily dismissed the Ingrahams as defendants, MidCountry removed the action to federal district court, invoking diversity jurisdiction. See 28 U.S.C. § 1332. 6 Appeal: 15-2104 Doc: 34 Filed: 11/30/2016 Pg: 7 of 15 Practices Act and for common-law constructive fraud. MidCountry moved claim, it statute of for asserted, summary was judgment. barred by And the limitations. Dreamstreet’s the applicable constructive UDTPA four-year fraud claim failed, MidCountry argued, because as a matter of law, Dreamstreet could not show the required element of a fiduciary relationship between the parties. The district court granted MidCountry’s motion for summary judgment in an oral ruling. It agreed with MidCountry that the four-year statute of limitations barred the UDTPA claim. constructive deciding fraud that claim, there the was MidCountry and Dreamstreet. district court a fiduciary assumed relationship On the without between But because Ingraham defaulted on his loan, the court concluded, the Agreement’s conditions on release of the holdback were not satisfied, and thus MidCountry did not breach Dreamstreet. any fiduciary duty it may have owed to Dreamstreet timely appealed. II. We review de novo the district court’s grant of summary judgment. Durham v. Horner, 690 F.3d 183, 188 (4th Cir. 2012). Summary judgment is appropriate only if no material facts are disputed and the moving party is 7 entitled to judgment as a Appeal: 15-2104 Doc: 34 matter of law. Filed: 11/30/2016 Pg: 8 of 15 Henry v. Purnell, 652 F.3d 524, 531 (4th Cir. 2011) (en banc). A. Dreamstreet’s first contention on appeal is that the district court erred in holding that its UDTPA claim is timebarred. Under North Carolina law, UDTPA claims are governed by a four-year statute of limitations, and that limitations period begins to run when an alleged violation occurs. Stat. § 75-16.2 (setting out limitations See N.C. Gen. period); Hinson v. United Fin. Servs., Inc., 473 S.E.2d 382, 386–87 (N.C. Ct. App. 1996) (applying UDTPA limitations period). And when, as in this case, a UDTPA claim is based on alleged fraudulent conduct, then the violation occurs – and the limitations clock starts running – “at the time that the fraud is discovered or should have been discovered with the exercise of reasonable diligence.” Rothmans Tobacco Co., Ltd. v. Liggett Grp., Inc., 770 F.2d 1246, 1249 (4th Cir. 1985) (citing Wilson v. Crab Orchard Dev. Co., 171 S.E.2d 873, 884 (N.C. 1970)). The parties do not dispute this governing framework. 4 Instead, they disagree as to whether Dreamstreet discovered or 4 Dreamstreet does suggest that it is “perhaps more appropriate” to analogize its action to one for breach of contract, in which case the limitations period would begin to run at the time of the breach. Appellant Br. at 22; see Ring Drug Co. v. Carolina Medicorp Enters., Inc., 385 S.E.2d 801, 804 (Continued) 8 Appeal: 15-2104 Doc: 34 Filed: 11/30/2016 Pg: 9 of 15 should have discovered the fraud of which it complains more than four years before it filed suit on June 28, 2013. According to Dreamstreet, the earliest date on which it could have discovered or been expected to discover MidCountry’s alleged fraud was December 10, 2009 – within the four-year limitations period – when Ingraham home. It MidCountry received was was not the certificate until required to then, make of compliance Dreamstreet good on the on argues, his that Agreement by releasing the holdback to Dreamstreet, and thus not until then that Dreamstreet could have known that MidCountry did not intend to honor the Agreement. What that position fails to account for is the undisputed fact that on June 16, 2009 – approximately two weeks outside the four-year limitations period – Dreamstreet itself announced that it planned to sue MidCountry on the same theory it advances in this litigation: that the seller holdback was a sham. June 16 email, Dreamstreet explained that the In its extensive (N.C. Ct. App. 1989) overruled on other grounds by Crossman v. Moore, 459 S.E.2d 715 (N.C. 1995). Like the district court, we disagree. In both its complaint and its brief before this court, Dreamstreet makes clear that its claim “is based on deceptive statements made by MidCountry” in order to induce Dreamstreet to enter into a “sham seller holdback scheme.” Appellant Br. at 22; see also J.A. 437 (district court explaining that “all the conduct the plaintiff is contending constitutes the [UDTPA violation] occurred back in 2008, in the inducement to enter into” the Agreement). 9 Appeal: 15-2104 Doc: 34 Filed: 11/30/2016 Pg: 10 of 15 documents it had shared with its attorney – “all emails from [MidCountry] during the initial closing, along with my note, deed of trust, regarding convince Carl both and a budget Ingraham’s Dreamstreet spreadsheet house and budget” its from – counsel [MidCountry] were that enough the to holdback funds were not intended for Ingraham’s construction budget and “never should have been held back in the first place.” By June attorney 16, were 2009, privy in to other words, information J.A. 86. Dreamstreet that led it to and its accuse MidCountry of fraud and threaten to “get a judge . . . to force the release of those funds.” that it lacked “capacity Id. and Dreamstreet cannot now claim opportunity to discover” that fraud, Grubb Props., Inc. v. Simms Inv. Co., 400 S.E.2d 85, 88 (N.C. Ct. App. 1991), until six months received a certificate of compliance. later, when Ingraham The limitations period on Dreamstreet’s UDTPA claim began running by June 16, 2009, see, e.g., Newton v. Barth, 788 S.E.2d 653, 662 (N.C. Ct. App. 2016) (UDTPA claim triggered when party discovers or should discover facts constituting alleged fraud), more than four years before Dreamstreet filed suit. With respect to the UDTPA claim, the district court properly granted summary judgment to MidCountry on statute of limitation grounds. 10 Appeal: 15-2104 Doc: 34 Filed: 11/30/2016 Pg: 11 of 15 B. We turn next to Dreamstreet’s constructive fraud claim, on which the district MidCountry. court also granted summary judgment to Under North Carolina law, the key to a constructive fraud claim is a fiduciary relationship between plaintiff and defendant. It is that relationship of “special confidence” that gives rise to a special duty to “act in good faith and with due regard to the interests of the one reposing confidence.” Branch Banking & Trust Co. v. Thompson, 418 S.E.2d 694, 699 (N.C. Ct. App. 1992) (internal quotation marks and citation omitted). When such a fiduciary relationship exists – and only when it exists – a plaintiff need not bear the “exacting” burden of proving actual fraud, but may instead rely on a presumption of constructive fraud that arises under equity “when the superior party obtains a possible benefit.” Cash v. State Farm Mut. Auto. Ins. Co., 528 S.E.2d 372, 380 (N.C. Ct. App. 2000); see also White v. Consol. Planning, Inc., 603 S.E.2d 147, 156 (N.C. Ct. App. 2004) (constructive fraud plaintiff need not prove intent to deceive). MidCountry argues that Dreamstreet relationship in this case, and we agree. law, fiduciary relationships are cannot show such a Under North Carolina characterized by “confidence reposed on one side, and resulting domination and influence on the other.” Dallaire v. Bank of America, N.A., 760 S.E.2d 263, 11 Appeal: 15-2104 Doc: 34 Filed: 11/30/2016 Pg: 12 of 15 266 (N.C. 2014) (internal quotation marks and citation omitted). Lawyers and their clients, for instance, or trustees and their beneficiaries, share such relationships, with a “heightened level of trust” matched with a corresponding duty to “maintain complete loyalty.” like the Agreement Id. By contrast, parties to a contract – between MidCountry and Dreamstreet – generally do not become each other’s fiduciaries; what they owe each other is defined by the terms of their contracts, with no special duty of loyalty. Branch Banking, 418 S.E.2d at 699; see also Dallaire, 760 S.E.2d at 267 (borrowers and lenders, unlike fiduciaries, “are generally bound only by the terms of their contract and the Uniform Commercial Code”). As a matter of law, there can be no fiduciary relationship between “parties in equal bargaining positions dealing at arm’s length, even though they are mutually interdependent businesses.” Strickland v. Lawrence, 627 S.E.2d 301, 306 (N.C. Ct. App. 2006). On the record in this case, it is clear that the relationship between MidCountry and Dreamstreet was no more than the standard one between two commercial entities negotiating a contract at arm’s length. Dreamstreet Banking, 418 “reposed S.E.2d any There is nothing to suggest that at sort 699, of in special confidence,” MidCountry; on the Branch contrary, skeptical of MidCountry’s proposal, Pittman consulted with an attorney, a banker, and a real 12 estate appraiser about the Appeal: 15-2104 Doc: 34 holdback Filed: 11/30/2016 before closing on Pg: 13 of 15 the sale of the lot. Such consultation with outside experts, North Carolina courts have held, is inconsistent with a claim of fiduciary relationship or constructive fraud. See id. (no fiduciary relationship where complaining party consulted with banker and accountant before entering into agreement); see also Sullivan v. Mebane Packaging Grp., Inc., 581 S.E.2d 452, 462 (N.C. Ct. App. 2003) (evidence that complaining party obtained outside counsel rebuts presumption of constructive fraud). Nor is there any indication that Dreamstreet was in the kind of unequal bargaining position that might qualify as an indication of a fiduciary relationship under North Carolina law. Dreamstreet emphasizes that it was MidCountry that devised the holdback arrangement and then proposed it to Dreamstreet. But the fact that one party proposes or advocates for a transaction is not enough to establish fiduciary relationship. unequal bargaining power and a North Carolina law makes clear, for instance, that borrowers ordinarily do not enjoy a fiduciary relationship or the protection of a special duty of loyalty when it comes to their lenders, even when those lenders encourage them to borrow. by bank lender debtor-creditor See Dallaire, 760 S.E.2d at 266-67 (assurances regarding mortgage relationship into loan do not fiduciary turn ordinary relationship); Branch Banking, 418 S.E.2d at 699 (reliance on representations 13 Appeal: 15-2104 of Doc: 34 creditor fiduciary Filed: 11/30/2016 does not turn relationship). Pg: 14 of 15 debtor-creditor Dreamstreet was relationship in a into position to consult with an attorney before agreeing to MidCountry’s terms. If Dreamstreet had concerns, then it could have declined the holdback proposal and forgone the sale of its lot – or it could take steps to protect itself, as it did, by insisting on a promissory note with Ingraham, secured by a deed of trust. We do not doubt, as Dreamstreet argues, that a fiduciary relationship does not depend in every case on the existence of a formal legal relationship like that between attorney and client or trustee and beneficiary. See Bumgarner v. Tomblin, 306 S.E.2d 178, 183 (N.C. Ct. App. 1983) (finding issue of fact as to fiduciary relationship where plaintiffs had long-term and regular dealings with defendant with special legal skills and real estate expertise). But it is clear that more is required than a “mutually interdependent” business relationship between two parties to a commercial contract. Strickland, 627 S.E.2d at 306; see Branch Banking, 418 S.E.2d at 699. The undisputed facts of this case reveal an ordinary contractual relationship, with nothing relationship. that And could give because rise the to a existence special of a fiduciary fiduciary relationship is a necessary element of constructive fraud, the 14 Appeal: 15-2104 Doc: 34 Filed: 11/30/2016 Pg: 15 of 15 district court properly granted summary judgment to MidCountry on this claim, as well. 5 III. For the foregoing reasons, we affirm the judgment of the district court. AFFIRMED 5 As noted above, the district court assumed the existence of a fiduciary relationship for purposes of its decision, and granted summary judgment on the ground that Dreamstreet could show no breach of any fiduciary duty it was owed. See Governors Club, Inc. v. Governors Club Ltd. P’ship, 567 S.E.2d 781, 787–88 (N.C. Ct. App. 2002) (constructive fraud plaintiff must show existence of fiduciary duty and breach of that duty). Because we hold that Dreamstreet cannot show the necessary fiduciary relationship as a matter of law, we need not address the district court’s alternative holding. 15

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