Synovus Bank v. Karp et al
MEMORANDUM OF DECISION AND ORDER granting in part and denying in part 31 Motion to Dismiss; accepting 36 Memorandum and Recommendations. IT IS FURTHER ORDERED that the parties shall conduct an initial attorneys' co nference within fourteen (14) days of the entry of this Order and shall file a Certificate of Initial Attorneys' Conference within seven (7) days thereafter. (SEE ORDER FOR DETAILS) Signed by District Judge Martin Reidinger on 8/15/12. (nll) Modified on 8/15/2012 (nll).
THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF NORTH CAROLINA
CIVIL CASE NO. 1:10cv172
JAMES G. KARP, G. DANIEL
SIEGEL, and THE KARP FAMILY
BARRON S. WALL,
KEVIN J. TRACY,
Civil No. 1:10cv172
Civil No. 1:10cv201
Civil No. 1:10cv202
NATIONAL BANK OF SOUTH
ANTHONY J. BARBIERI,
NATIONAL BANK OF SOUTH
3GMA REALTY, LLC, and GERALD
GREGORY S. KEARY,
Civil No. 1:10cv215
Civil No. 1:10cv217
Civil No. 1:10cv218
NATIONAL BANK OF SOUTH
BENJAMIN W. ATKINSON and
DANIEL S. HINKSON,
NATIONAL BANK OF SOUTH
KATHERINE H. WILLIAMS,
PATRICIA M. TRACY,
Civil No. 1:10cv220
Civil No. 1:10cv221
Civil No. 1:10cv231
MEMORANDUM OF DECISION AND ORDER
THIS MATTER is before the Court on the Plaintiff Synovus Bank’s
Motion to Dismiss [Doc. 31]; the Magistrate Judge’s Memorandum and
Recommendation regarding the disposition of such motion [Doc. 36]; and the
Recommendation [Docs. 41, 43].
This case has its origin in a series of collection actions brought by the
Plaintiff Synovus Bank, the successor in interest through name change and
by merger with The National Bank of South Carolina (“NBSC”) (“Synovus
Bank” or “Bank”), against the Defendants James G. Karp, G. Daniel Siegel,
and the Karp Family Limited Partnership (the “Karp Defendants”); Barron S.
Wall; Kevin J. Tracy; Anthony J. Barbieri; Gerald Abatemarco and 3GMA
Realty, LLC (the “Abatemarco Defendants”); Gregory S. Keary; Daniel S.
Hinkson and Benjamin W. Atkinson (the “Hinkson Defendants”); Katherine H.
Williams; and Patricia M. Tracy (collectively, the “Defendants”) in the
Buncombe County General Court of Justice, Superior Court Division. In its
collection actions, the Plaintiff seeks the recovery of money it contends that
the Defendants owe pursuant to various loan agreements the Defendants
executed in order to finance the purchase of undeveloped lots in a real estate
development in Cashiers, North Carolina, known as the River Rock
subdivision (“River Rock”). The Defendants subsequently removed each of
these collection actions to this Court.
Following the removal of these actions, the Defendants filed Answers
and asserted Counterclaims against the Plaintiff. On December 10, 2010, the
Magistrate Judge consolidated these cases for all pretrial proceedings and
allowed the Defendants one final opportunity to amend their Answers and
assert viable Counterclaims. [Doc. 20]. The Court also directed Synovus
Bank to file a consolidated motion to dismiss the Counterclaims and for the
Defendants to file a consolidated response. [Id.].
Consistent with the Court’s Order, several of the Defendants filed
Amended Counterclaims.1 Although these Counterclaims are based on the
same general set of facts, the specific factual allegations and claims vary by
For example, the Karp Defendants, the Hinkson
Defendants, and Defendants Wall, Barbieri, K. Tracy, and Williams assert
claims for violation of the North Carolina Unfair and Deceptive Trade Practices
Defendants Kevin Tracy, Keary, and Williams did not file further Amended
Counterclaims and instead rely on the Amended Counterclaims previously filed in their
respective individual actions. Accordingly, any citations to these Amended
Counterclaims will include a reference to those cases’ individual case numbers.
Act, N.C. Gen. Stat. § 75-1.1, et seq. (“Chapter 75”); fraud and fraud in the
inducement; violation of the North Carolina Mortgage Lending Act, N.C. Gen.
Stat. § 53-243.11; negligent misrepresentation; and violation of the Interstate
Land Sales Full Disclosure Act, 15 U.S.C. §§ 1701, et seq. (“ILSA”). [Karp
Am. Counterclaim, Doc. 12; Barbieri Am. Counterclaim, Doc. 26; Hinkson Am.
Counterclaim, Doc. 27; Wall Am. Counterclaim, Doc. 30; see also K. Tracy
Am. Counterclaim, Case No. 1:10cv202, Doc. 13 and Williams Am.
Counterclaim, Case No. 1:10cv221, Doc. 13]. The Abatemarco Defendants
and Defendants Keary and Patricia Tracy, on the other hand, assert only
claims for violation of Chapter 75, violation of the North Carolina Mortgage
Lending Act, negligent misrepresentation, and violation of the ILSA.
[Abatemarco Am. Counterclaim, Doc. 28; P. Tracy Am. Counterclaim, Doc. 29;
see also Keary Am. Counterclaim, Case No. 1:10cv218, Doc. 8].
On January 31, 2011, the Bank filed a motion seeking the dismissal of
all of the Counterclaims asserted by the Defendants. [Doc. 31]. In support of
its motion, the Bank argues that the Defendants’ Counterclaims are subject
to dismissal because they are not supported by plausible factual allegations
and, therefore, fail as a matter of law (the “plausibility argument”); that
Defendants’ fraud and ILSA claims fail because they are not pled with
sufficient particularity as required by Rule 9 of the Federal Rules of Civil
Procedure; that the ILSA claims also fail because Synovus Bank is not an
“agent or developer” within the meaning of that Act; that the statements
forming the basis of Defendants’ fraud claims are expressions of opinion that
are not actionable in fraud; that the factual allegations do not support the
claims for negligent misrepresentations or unfair and deceptive trade
practices; and that the North Carolina Mortgage Lending Act claims fail
because that Act has been repealed and in any event does not apply to the
loans that the Defendants secured from the Bank. [Doc. 32]. The Bank
further contends that the Defendants Patricia Tracy, Gerald Abatemarco, and
James Karp each waived any counterclaims and defenses pursuant to
releases contained in the documents they executed in association with
securing the loans at issue. [Id.].
In response to the Motion to Dismiss, the Defendants oppose the
dismissal of their Counterclaims, arguing that these claims were sufficiently
pled and state plausible claims for relief. [Doc. 33].2
The Defendants agree, however, to the dismissal of their counterclaims brought
pursuant to the Mortgage Lending Act. [Doc. 34 at 7]. Accordingly, these counterclaims
will be dismissed.
Pursuant to 28 U.S.C. § 636(b) and the Standing Orders of Designation
of this Court, the Honorable Dennis L. Howell, United States Magistrate
Judge, was designated to consider the Plaintiff’s Motion to Dismiss and to
submit a recommendation for its disposition.
On October 5, 2011, the
Magistrate Judge entered a Memorandum and Recommendation regarding
the Plaintiff’s Motion. [Doc. 36]. Specifically, the Magistrate Judge rejected
the Plaintiff’s plausibility argument, finding that the factual allegations as
stated in the Amended Counterclaims were sufficient to plead plausible claims
for relief. [Id. at 15]. The Magistrate Judge went on to conclude, however,
that the allegations in the Amended Counterclaims were insufficient to
demonstrate that Synovus Bank was an agent or developer within the
meaning of the ILSA and therefore recommended that these Counterclaims
be dismissed. [Id. at 19].
With respect to the Defendants’ claims of fraud, the Magistrate Judge
concluded that the Defendants had alleged these claims with sufficient
particularity and thus recommended that the motion to dismiss be denied as
to these Counterclaims.
[Id. at 22].
As for the claims of negligent
misrepresentation, the Magistrate Judge found that the Defendants had failed
to make more than conclusory allegations to support their claim that Synovus
Bank owed the Defendants a duty of care related to the alleged
[Id. at 22-24].
Accordingly, the Magistrate Judge
recommended the dismissal of these Counterclaims. [Id.]. With respect to the
Defendants’ Chapter 75 claims, the Magistrate Judge concluded that the
Amended Counterclaims contained sufficient factual allegations to support the
Defendants’ claims of unfair and deceptive and trade practices by the Bank.
Accordingly, the Magistrate Judge recommended that the motion to dismiss
the Chapter 75 counterclaims be denied. [Id. at 25-26].
Finally, the Magistrate Judge concluded that Defendants Patricia Tracy,
Gerald Abatemarco, and James Karp had waived all counterclaims and
defenses to Synovus Bank’s claims because the documents they executed in
connection with their loans contain various releases and waivers.
Accordingly, the Magistrate Judge recommended that all of the Counterclaims
asserted by these Defendants be dismissed. [Id. at 26-30].
Both Synovus Bank and the Defendants filed Objections to the
Magistrate Judge’s Memorandum and Recommendation.
Synovus Bank objects to the Magistrate Judge’s conclusions regarding the
plausibility of the Defendants’ counterclaims, as well as to the Magistrate
Judge’s conclusion that the Amended Counterclaims state claims for fraud
and for unfair and deceptive trade practices under Chapter 75. [Doc. 41].
The Defendants object to the Magistrate Judge’s recommendation that their
ILSA and negligent misrepresentation claims be dismissed. [Doc. 43]. The
Defendants further object to the Magistrate Judge’s recommendation that all
counterclaims asserted by Patricia Tracy, Gerald Abatemarco, and James
Karp be dismissed in light of the releases and waivers they executed in their
loan documents. [Id.]. Both sides have responded to the other’s objections.
[Docs. 44, 45].3
Having been fully briefed, this matter is now ripe for disposition.
STANDARD OF REVIEW
Standard of Review Applicable to Objections to Magistrate
Judge’s Memorandum and Recommendation
The Federal Magistrate Act requires a district court to “make a de novo
determination of those portions of the report or specific proposed findings or
recommendations to which objection is made.” 28 U.S.C. § 636(b)(1). In
order “to preserve for appeal an issue in a magistrate judge’s report, a party
must object to the finding or recommendation on that issue with sufficient
Additionally, on January 18, 2012, Synovus Bank filed a Notice of Subsequently
Decided Authority [Doc. 46], bringing to the Court’s attention the recently decided
opinion of the North Carolina Court of Appeals in the case of In re Fifth Third Bank,
National Association -- Village of Penland Litigation, 719 S.E.2d 171 (N.C. Ct. App.
specificity so as reasonably to alert the district court of the true ground for the
objection.” United States v. Midgette, 478 F.3d 616, 622 (4th Cir. 2007). The
Court is not required to review, under a de novo or any other standard, the
factual or legal conclusions of the magistrate judge to which no objections
have been raised. Thomas v. Arn, 474 U.S. 140, 150, 106 S.Ct. 466, 88
L.Ed.2d 435 (1985). Additionally, the Court need not conduct a de novo
review where a party makes only “general and conclusory objections that do
not direct the court to a specific error in the magistrate’s proposed findings
and recommendations.” Orpiano v. Johnson, 687 F.2d 44, 47 (4th Cir. 1982).
Rule 12(b)(6) Standard of Review
In reviewing a motion to dismiss filed pursuant to Rule 12(b)(6), the
Court is guided by the Supreme Court’s instructions in Bell Atlantic Corp. v.
Twombly, 550 U.S. 544, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) and
Ashcroft v. Iqbal, 556 U.S. 662, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009). As
the Fourth Circuit has noted, “those decisions require that complaints in civil
actions be alleged with greater specificity than previously was required.”
Walters v. McMahen, 684 F.3d 435, 439 (4th Cir. 2012).
In order to survive a motion to dismiss pursuant to Rule 12(b)(6), “a
complaint must contain sufficient factual matter, accepted as true, to ‘state a
claim to relief that is plausible on its face.’” Iqbal, 556 U.S. at 678, 129 S.Ct.
1937 (2009) (quoting Twombly, 550 U.S. at 570, 127 S.Ct. 1955). To be
“plausible on its face,” a plaintiff must demonstrate more than “a sheer
possibility that a defendant has acted unlawfully.” Iqbal, 556 U.S. at 678, 129
In reviewing the complaint, the Court must accept the truthfulness of all
factual allegations but is not required to assume the truth of “bare legal
conclusions.” Aziz v. Alcolac, Inc., 658 F.3d 388, 391 (4th Cir. 2011). “The
mere recital of elements of a cause of action, supported only by conclusory
statements, is not sufficient to survive a motion made pursuant to Rule
12(b)(6).” Walters, 684 F.3d at 439.
To survive a Rule 12(b)(6) motion, “a complaint must state a ‘plausible
claim for relief.’”
Id. (quoting Iqbal, 556 U.S. at 678, 129 S.Ct. 1937).
Determining whether a complaint states a plausible claim for relief is “a
context-specific task,” Francis v. Giacomelli, 588 F.3d 186, 193 (4th Cir.
2009), which requires the Court to assess whether the factual allegations of
the complaint are sufficient “to raise a right to relief above the speculative
level,” Twombly, 550 U.S. at 555, 127 S.Ct. 1955. As the Fourth Circuit has
To satisfy this standard, a plaintiff need not forecast
evidence sufficient to prove the elements of the claim.
However, the complaint must allege sufficient facts to
establish those elements. Thus, while a plaintiff does
not need to demonstrate in a complaint that the right
to relief is probable, the complaint must advance the
plaintiff’s claim across the line from conceivable to
Walters, 684 F.3d at 439 (citations and internal quotation marks omitted).
Viewing the allegations of the Amended Counterclaims 4 as true, the
following is a summary of the relevant facts.
The Defendants’ Purchase of Lots at River Rock
River Rock is a subdivision in Cashiers, North Carolina that originally
consisted of approximately 4,000 acres of undeveloped land. [See e.g., Karp
Am. Counterclaim, Doc. 12 at ¶ 7]. Synovus Bank loaned approximately
$12.5 million to third party Legasus of North Carolina, LLC (“Legasus”) so that
Legasus could purchase and develop River Rock. [Id. at ¶¶ 8-11]. Each of
the Defendants entered into a contract with Legasus to purchase a lot at River
Rock. [Id. at ¶ 13]. The purchase price of the lots ranged from $239,900 to
Where the factual allegations of the Amended Counterclaims are substantially
similar, the Court will cite only to the Amended Counterclaim of the Karp Defendants.
Where the allegations vary, the Court will cite to each Amended Counterclaim
$550,000. [See App’x 1 to Motion to Dismiss, Doc. 32-32]. The Defendants
financed the purchase of these lots by taking out loans with Synovus Bank for
ninety percent of the purchase price of the lot. [Karp Am. Counterclaim, Doc.
12 at ¶38].5 The terms of the loans provided for interest-only payments for a
period ranging from one and one-half years to five years. [Id.; App’x 1 to
Motion to Dismiss, Doc. 32-32]. As part of the agreement to purchase the
lots, Legasus took the Defendants’ down payments for the lots and transferred
the money to an account at Synovus Bank. [Karp Am. Counterclaim, Doc. 12
at ¶ 39]. The Defendants then established an automatic payment mechanism
so that these funds would cover the interest payments on the loan until the
funds were depleted. [Id.].
Synovus Bank hired Marilyn Woods of Woods Appraisal Service to
conduct the appraisal of the lots in connection with the loans. [Id. at ¶ 32].
Michael Wolf, a loan officer with Synovus Bank, hired Woods because he
believed that she would provide an inflated value of the lots. [Id. at ¶ 33]. The
Defendants allege that Woods did in fact provide inflated appraisals to
Synovus Bank. [See id. at ¶¶ 33-34, 36]. Specifically, the Defendants allege
The one exception is Defendant Hinkson, who financed ninety-five percent of
the lot’s purchase price. [Hinkson Am. Counterclaim, Doc. 27 at ¶ 22; App’x 1 to Motion
to Dismiss, Doc. 32-32].
that Woods failed to consider lots outside of River Rock as comparables and
failed to take into account the lack of adequate infrastructure and utilities in
the River Rock development. [Id. at ¶¶ 35-36]. The Defendants also allege
that Synovus Bank knew that these appraisals were inflated but used them to
support the loans it provided the Defendants to purchase the lots. [Id. at ¶
36]. Additionally, some of the Defendants contend that Synovus Bank failed
to provide them with a copy of the appraisal prior to the closing date of the
lots. [See e.g., Wall Am. Counterclaim, Doc. 30 at ¶¶ 41-43].
The Alleged Misrepresentations
In connection with the purchases of the lots, the Defendants allege that
misrepresentations regarding the value of the lots and the viability of River
Rock development in general. These representations include statements by
Wolf that the lots were “an incredible investment” [Karp Am. Counterclaim,
Doc. 12 at ¶ 24] and “a good investment” [K. Tracy Am. Counterclaim, Case
No. 1:10cv202, Doc. 13 at ¶ 19]; that Defendant Barbieri “would make money”
on the lot [Barbieri Am. Counterclaim, Doc. 26 at ¶ 22]; that River Rock was
“a viable development” [Williams Am. Counterclaim, Case No. 1:1cv221, Doc.
13 at ¶ 30]; that future buyers would be attracted to the fact that professional
golfer Phil Mickelson had agreed to “do a golf course at River Rock” [Id. at ¶
31]; and that Defendants would be able to sell or re-finance the lots before the
money set aside by Legasus to pay the initial eighteen months of interest on
the loan was depleted or prior to the expiration of the interest-only portion of
the loan [Karp Am. Counterclaim, Doc. 12 at ¶ 27; K. Tracy Am. Counterclaim,
Case No. 1:10cv202, Doc. 13 at ¶ 24; Barbieri Am. Counterclaim, Doc. 26 at
¶ 21; Keary Am. Counterclaim, Case No. 1:10cv218, Doc. 8 at ¶ 27].
The Alleged Scheme to Defraud the Defendants
Although the specific factual allegations related to the alleged fraudulent
scheme vary somewhat in each of the Amended Counterclaims, the general
nature of the alleged scheme is as follows. The Defendants allege that
Synovus Bank fraudulently induced them to purchase lots at River Rock at an
inflated price by structuring the loan so that the funds they used for the down
payment on the lot were used to pay the interest payments on the loan during
approximately the first eighteen months. [Karp. Am. Counterclaim, Doc. 12
at ¶ 39]. Synovus Bank was able to inflate the price of the lot by using false
appraisals from Woods. [Id. at ¶ 36]. Synovus Bank knew that this practice
was not sustainable in the long term but, nonetheless, persisted with its plan.
[Id. at ¶ 40]. In spite of knowing that this was not a sustainable business
practice, the Bank participated in a scheme designed to inflate the prices of
the lots and issue loans to the Defendants on property that it knew was worth
only a fraction of the loans’ value in order to maximize Synovus Bank’s shortterm financial growth. [Wall Am. Counterclaim, Doc. 30 at ¶ 65]. Accordingly,
Synovus Bank made loans that it knew posed a high level of long-term risk
“because it was attempting to grow rapidly by making loans that were of low
quality and charging borrowers a premium yield.” [Id. at ¶ 66]. The Bank
received guaranteed interest payments from Legasus at closing to bolster its
short-term growth. [Id. at ¶¶ 53, 58-59]. In total, Synovus Bank received
approximately one million dollars over a two-year period from the transfer of
seller-paid interest from Legasus to Synovus Bank upon the closing of
approximately thirty loans tied to the purchase of lots at River Rock. [Id. at ¶¶
62-63]. The Bank also received a small loan origination fee. [Id. at ¶¶ 54, 61].
In short, the Defendants contend that Synovus Bank undertook the risk
associated with lending money to unqualified individuals to purchase property
that Synovus Bank knew was overvalued and, in some cases, knew that the
individuals would not be able to make payments on these loans once the
interest-only period ended, in order to stimulate short-term revenue. [See
Karp. Am. Counterclaim, Doc. 12 at ¶ 26, 31, 36, 40; Barbieri Am.
Counterclaim, Doc. 26 at ¶ 21]. The Defendants allege that the Bank
disregarded the “substantial long term risk” to its business from this practice
in order to create a short-term appearance of profitability on its financial
statements. [K. Tracy Am. Counterclaim, Case No. 1:10cv202, Doc. 13 at ¶¶
45, 48, 49]. This scheme came to a halt after the collapse of the real estate
market in 2008. [Wall Am. Counterclaim, Doc. 30 at ¶¶ 74-79].
Plausibility of Defendants’ Counterclaims
Synovus Bank objects to the Magistrate Judge’s conclusion that the
Defendants’ claims are sufficiently plausible to withstand scrutiny under
Twombly and Iqbal. Specifically, the Bank argues that the underlying theory
of the Defendants’ Counterclaims is so contrary to the Bank’s long-term
business interests as to be implausible as a matter of law. [Doc. 41 at 5-12].
In support of this argument, the Bank relies on three district court
decisions, Feeley v. Total Realty Management, 660 F.Supp.2d 700 (E.D. Va.
2009), Goldstein v. Bank of America, No. 1:09cv329, 2010 WL 1252641
(W.D.N.C. Jan. 10, 2010) (Howell, M.J.), and Bank of America v. Lykes, No.
1:09cv435, 2010 WL 2640454 (W.D.N.C. May 20, 2010) (Howell, M.J.). In
each of these cases, however, the court determined that the plaintiffs had
failed to allege specific facts to support their claims and had failed to make
plausible allegations to support the theory that a lender would be willing to
collude or conspire with a developer to make under-collateralized loans to
borrowers to the detriment of the lender’s own financial interests. See Feeley,
660 F.Supp.2d at 708; Goldstein, 2010 W L 1252641, at *5; Lykes, 2010 WL
2640454, at *6. By contrast, in the present case, the Defendants’ allegations,
when assumed to be true, establish a plausible reason (i.e., the desire for
short-term profitability) for the Bank’s willingness to knowingly make undercollateralized loans to the Defendants, even if such loans may have been, as
argued by the Bank, contrary to the Bank’s long-term financial interests.
Further, the Defendants have pled sufficient factual allegations detailing the
basis of their claims against the Bank. As such, Feeley, Goldstein, and Lykes
are distinguishable from the present case.
As the events of the recent economic crisis have demonstrated, financial
institutions do not always make the most prudent business decisions, and
they sometimes may accept what would otherwise appear to be unreasonable
economic risks for the sake of immediate, short-term profitability. Thus, while
the Bank’s conduct, as alleged by the Defendants, may not appear to have
been the most prudent course of action for the Bank to take in terms of its
long-term business interests, that certainly does not mean that such conduct
is not plausible as a matter of law.6 Indeed, as the Magistrate Judge correctly
noted, assuming the truth of the Defendants’ Counterclaims, “Synovus Bank
would not be the first corporation in the history of modern economics to
undertake an action that carried substantial risk to its long term financial
viability in order to increase short term profits or revenue.” [Doc. 36 at 14].
Construing the well-pled factual allegations of the Counterclaims in the light
most favorable to the Defendants, the Court concludes that the Defendants
have pled sufficient factual allegations in the Amended Counterclaims to state
claims that are plausible on their face. For these reasons, the Bank’s first
objection is overruled, and the Motion to Dismiss the Defendants’
Counterclaims as implausible is denied.
The Bank objects to the Magistrate Judge’s conclusion that the
Amended Counterclaims set forth valid claims for fraud and are therefore not
subject to dismissal pursuant to Rule 12(b)(6). Specifically, the Bank argues
In essence, the Bank’s argument appears to be that if the theory of recovery
underlying the claim is unlikely, the claim is subject to dismissal on the basis of
implausibility. Such an argument, however, reads too much into the Iqbal standard.
Iqbal does not require the Court to determine the likelihood of the facts alleged but
rather to determine whether the factual allegations pled in support of that claim are
sufficient to render the claim plausible.
that these claims have not been pled with the requisite specificity, and that the
representations are nothing more than statements of opinions and are
therefore not actionable. [Doc. 41 at 12-14].
In order to state a valid claim for fraud under North Carolina law, a party
must allege a false representation or concealment of a material fact that: (1)
was reasonably calculated to deceive; (2) was made with the intent to
deceive; (3) did in fact deceive the plaintiff; and (4) resulted in damages to the
Anderson v. Sara Lee Corp., 508 F.3d 181, 189 (4th Cir. 2007).
Additionally, the party must demonstrate any reliance on the false
representations was reasonable. See id.
Where a party’s allegations sound in fraud, the allegations must satisfy
the heightened pleading standards of Rule 9 of the Federal Rules of Civil
Procedure. Cozzarelli v. Inspire Pharmaceuticals Inc., 549 F.3d 618, 629 (4th
Cir. 2008). Rule 9(b) provides that when “alleging fraud or mistake, a party
must state with particularity the circumstances constituting fraud or mistake.
Malice, intent, knowledge, and other conditions of a person's mind may be
alleged generally.” Fed. R. Civ. P. 9(b). Rule 9 applies not only to claims
asserting common law fraud, but to all claims where the allegations have the
substance of fraud.
Cozzarelli, 549 F.3d at 629.
A claim is subject to
dismissal under Rule 12(b)(6) for failure to state a claim if it does not comply
with Rule 9(b). Harrison v. Westinghouse Savannah River Co., 176 F.3d 776,
783 n.5 (4th Cir.1999).
Here, a review of each of the Defendants’ Amended Counterclaims
reveals that the Defendants have alleged the general time, place and content
of each alleged fraudulent statement, while also identifying the person who
made each statement and the recipient of each statement. These allegations
are sufficient to comport with the requirements of Rule 9(b) and thus the
Magistrate Judge correctly concluded that the Defendants have stated claims
for fraud. The Bank’s contention that the Defendants failed to plead their
fraud counterclaims with sufficient particularity is, therefore, rejected.
The Bank further contends that the Defendants’ fraud counterclaims
must be dismissed to the extent that they are premised upon mere
expressions of opinion. “A representation which is nothing more than an
opinion as to the value of property, absent something more, does not
constitute actionable fraud.” Hall v. T.L. Kemp Jewelry, Inc., 71 N.C. App.
101, 106, 322 S.E.2d 7, 11 (1984). While the Bank discounts the Defendants’
fraud claims as merely relying on statements of opinions expressed by Bank
employee Michael Wolf, a review of the Defendants’ allegations reveals that
at least some of the misrepresentations alleged were more than mere
statements of opinion. For example, the Karp Defendants alleged that Wolf
told them that “even after commission and costs, the Defendants would make
a profit because they were buying Phase I inventory at Phase I pricing, which
had built in appreciation of ten percent over Phase II lots” and that, because
the Phase II lots had to “be sold by Legasus salespersons at set prices as
determined by Legasus,” the Defendants as independent owners “could
decide to sell their Lot at pricing below the Phase II pricing and still at least
break even on their investment.” [Karp Am. Counterclaim, Doc. 12 at ¶ 28].
The statements that the Defendants were buying “Phase I inventory at Phase
I pricing” and that “Phase II lots must be sold by Legasus salespersons at set
prices as determined by Legasus” are clearly statements based upon then
existing facts, not statements based upon opinion or predictions of future
actions or outcomes. Likewise, the statement that the Phase II lots had to be
sold by Legasus salespersons at set prices is a statement of fact based upon
Legasus policy (i.e., an established requirement) and is not an opinion.
Admittedly, some of the misrepresentations that were alleged to have
been made amount to nothing more than statements of opinion by Wolf. For
example, Defendant Williams alleges that in December of 2006, Wolf stated
that he “felt good” about the River Rock development [Williams Am.
Counterclaim, Case No. 1:10cv221, Doc. 13 at ¶ 19], and Defendant Barbieri
alleges that Wolf stated that Barbieri “would make money” if he bought the lot
because it was in the first tract of land that would be subdivided at River Rock
and therefore “he would be able to get a building permit” on his lot before lots
in other phases of River Rock, which would “make his lot more valuable and
easier to sell.” [Barbieri Am. Counterclaim, Doc. 26 at ¶ 22]. Even though
such statements are merely expressions of opinion, as the Magistrate Judge
correctly recognized, “a statement purporting to be opinion may be the basis
for fraud if, at the time it is made, the maker of the statement holds an opinion
contrary to the opinion he or she expresses, and the maker also intends to
deceive the listener.” Leftwitch v. Gaines, 134 N.C. App. 502, 509-10, 521
S.E.2d 717, 723, disc. rev. denied, 351 N.C. 357, 541 S.E.2d 713 (1999). The
Defendants have alleged that Wolf made such statements to the Defendants
knowing the same to be false and with the intent to deceive the Defendants.
[See Karp Am. Counterclaim, Doc. 12 at ¶¶ 58-60; Barbieri Am. Counterclaim,
Doc. 26 at ¶¶ 101-02; Hinkson Am. Counterclaim, Doc. 27 at ¶¶ 115-17; Wall
Am. Counterclaim, Doc. 30 at ¶¶ 110-12; K. Tracy Am. Counterclaim, No.
1:10cv202, Doc. 13 at ¶¶ 83-85; Williams Am. Counterclaim, Case No.
1:10cv221, Doc. 13 at ¶ 97-99]. Thus, even if some of Wolf’s representations
were expressions of opinion, the Defendants have still stated an adequate
basis for their fraud claims to survive a Rule 12(b)(6) motion.7
For these reasons, the Bank’s objections are overruled, and the Motion
to Dismiss the Defendants’ fraud counterclaims is denied.
Chapter 75 Claims
The Bank further objects to the Magistrate Judge’s recommendation that
the Motion to Dismiss be denied as to the Defendants’ Chapter 75 claims.
[Doc. 41 at 14-16].
To state a claim for unfair and deceptive trade practices under Chapter
75, a party must allege sufficient facts to show “(1) an unfair or deceptive act
or practice, or an unfair method of competition, (2) in or affecting commerce,
(3) which proximately caused actual injury to the plaintiff or to his business.”
Spartan Leasing, Inc v. Pollard, 101 N.C. App. 450, 460-61, 400 S.E.2d 476,
482 (1991). A deceptive practice is one that has “the capacity or tendency to
deceive the average consumer, but proof of actual deception is not required.”
Id. at 461, 400 S.E.2d at 482.
Of course, it remains to be seen whether the Defendants will be able to present
a forecast of evidence sufficient for all of their fraud claims to survive a summary
The Bank argues that to the extent that the Defendants’ claims are
based on allegations related to false appraisals, such allegations should not
be considered because these appraisals were conducted for the benefit of the
Bank and not the Defendants, and thus it was not reasonable for the
Defendants to rely upon them. Even if such appraisals do not support the
Defendants’ Chapter 75 claims, however, the Amended Counterclaims contain
numerous other allegations of what would constitute unfair and deceptive
trade practices, such as false representations regarding the value of the lots,
the status of the development at River Rock, and the ability of the Defendants
to sell their lots prior to the expiration of the loan term. As the Magistrate
Judge correctly recognized, each of these statements had the “capacity to
mislead” the Defendants and can thus constitute unfair and deceptive trade
practices. Moreover, “[p]roof of fraud necessarily constitutes a violation of the
prohibition against unfair and deceptive acts.” Winston Realty Co. v. G.H.G.,
Inc., 314 N.C. 90, 97, 331 S.E.2d 677, 681 (1985). Because the Court has
concluded that the Defendants have stated plausible fraud claims with enough
particularity to survive the Plaintiff’s Motion to Dismiss, the Court likewise will
deny the Motion to Dismiss with respect to the Chapter 75 claims. The Bank’s
objection, therefore, is overruled.
The Defendants object to the Magistrate Judge’s recommendation that
their claims under the ILSA be dismissed, arguing that their allegations are
sufficient to establish that Synovus Bank was a “developer” or “agent of the
developer” within the meaning of the ILSA. [Doc. 43 at 6-10].
The ILSA “is designed to prevent false and deceptive practices in the
sale of unimproved tracts of land by requiring developers to disclose
information needed by potential buyers.” Flint Ridge Dev. Co. v. Scenic
Rivers Ass’n of Okla., 426 U.S. 776, 778, 96 S.Ct. 2430, 2433, 49 L.Ed.2d 205
(1976). “The Act also requires sellers to inform buyers, prior to purchase, of
facts which would enable a reasonably prudent individual to make an informed
decision about purchasing a piece of real property.” Burns v. Duplin Land
Dev., Inc., 621 F.Supp.2d 292, 301 (E.D.N.C. 2009).
An individual who purchases a lot may bring a civil action under the
ILSA against a “developer or agent” who violates Section 1703(a). 15 U.S.C.
§ 1709; see also Burns, 621 F.Supp.2d at 301. A “developer” is defined as
“any person who, directly or indirectly, sells or leases, or offers to sell or lease,
or advertises for sale or lease any lots in a subdivision . . . .” 15 U.S.C. §
1701(5). An “agent” is defined as “any person who represents, or acts for or
on behalf of, a developer in selling or leasing, or offering to sell or lease, any
lot or lots in a subdivision. . . .” 15 U.S.C. § 1701(6).
As the Magistrate Judge correctly noted [Doc. 36 at 17], a lending
institution acting in the ordinary course of its business is generally not
considered a “developer” within the meaning of the ILSA. See Cumberland
Cap. Corp. v. Harris, 621 F.2d 246, 251 (6th Cir. 1980); Kenneally v. Bank of
Nova Scotia, 711 F.Supp.2d 1174, 1191-92 (S.D. Cal. 2010) (collecting
cases); Hammar v. Cost Control Mktg. and Sales Mgmt. of Va., Inc., 757
F.Supp. 698, 702 (W.D. Va. 1990). “It is only where a financial institution acts
beyond its ordinary course of dealing as a lending institution and participates
in the actual development, marketing or sale of property that liability may arise
Thompson v. Bank of Am., No. 7:09-CV-89-H, 2011 WL
1253163, at *1 (E.D.N.C. Mar. 30, 2011) (citations omitted).
Defendants have asserted that Synovus Bank was a developer or agent within
the meaning of the ILSA, they have failed to allege sufficient facts to support
such a finding. The Defendants’ factual allegations, when separated from
their conclusory statements, claim that Wolf appeared at off-site sales events,
made statements regarding the quality of the lots as investments, and made
one statement that the Bank was one of the major funders of the
development. They do not allege, however, that the Bank had authority to sell
lots or that it actually did sell any lots to Defendants. At best, the factual
allegations set forth in the Amended Counterclaims state that Wolf was at the
off-site event only to speak to potential buyers about obtaining financing for
the purchase of a lot. The Defendants’ attempt in their Response brief to recharacterize their allegations is of no effect. [See Doc. 43 at 7 (“of course, the
only purpose of this event was to sell lots in River Rock”)]. Further, Wolf’s
alleged statements regarding the value of the lots and that the Bank was one
of the major funders of the project cannot fairly be said to demonstrate that
the Bank participated in the development to such a degree that it went beyond
its ordinary position as a lender and should now be considered a “developer”
for the purposes of the ILSA. Further, unlike the plaintiffs in Hammar v. Cost
Control Marketing & Sales Management Inc., 757 F. Supp. 698, 702-03 (W.D.
Va. 1990), a case on which the Defendants rely, the Defendants have not
produced advertising material suggesting the Bank may be an “affiliate” of the
Developer. As the Magistrate Judge correctly concluded, the Defendants
have failed to allege facts sufficient to make out a claim based on the Bank
having stepped outside of the ordinary course of its business as a lender such
that liability could be imposed under the ILSA. Accordingly, the Defendants’
objection is overruled, and the Defendants’ ILSA claims are dismissed.
Negligent Misrepresentation Claims
The Defendants object to the Magistrate Judge’s recommendation that
their claims for negligent misrepresentation be dismissed, arguing that they
have alleged sufficient facts to support their contention that the Bank
undertook a duty of care to the Defendant when its employees chose to make
statements regarding the quality of the Defendants’ investments in River
Rock. [Doc. 43 at 10-13]. The Defendants’ argument, however, is without
A bank owes a borrower only those duties that are specified in the loan
agreement. See Camp v. Leonard, 133 N.C. App. 554, 560, 515 S.E.2d 909,
913 (1999) (“a lender is only obligated to perform those duties expressly
provided for in the loan agreement to which it is a party”). The Defendants
have not identified any cases construing North Carolina law that recognize an
extra-contractual duty arises simply because misrepresentations are made
before loan agreements are executed.
At least one case in which prior
representations were apparently made, Branch Banking & Trust Company v.
Thompson, did not mention such a distinction. See 107 N.C. App. 53, 61, 418
S.E.2d 694, 699 (noting misrepresentation by BB&T officers prior to execution
of loan documents but concluding that “[t]he record does not reveal any facts
suggesting that the [defendants] reposed any sort of special confidence in
BB&T which would serve to give rise to a fiduciary relationship.”), disc. rev.
denied, 332 N.C. 482, 421 S.E.2d 350 (1992).
Here, the Magistrate Judge correctly concluded that the Defendants’
allegations do not support a finding of any type of special relationship between
Synovus Bank and the Defendants beyond that of the typical lender-borrower
[Doc. 36 at 24].
Accordingly, the Defendants’ objection is
overruled, and the Defendants’ negligent misrepresentation claims are
Waiver by Defendants P. Tracy, Abatemarco, and Karp
Finally, the Defendants object to the Magistrate Judge’s conclusion that
Defendants Patricia M. Tracy, Gerald M. Abatemarco, and James G. Karp
waived any counterclaims and defenses through releases executed in their
loan documents. [Doc. 43 at 13-16]. Specifically, the Defendants contend
that the releases are unenforceable pursuant to public policy. [Id.].
North Carolina courts have recognized that “an exculpatory contract will
be enforced unless it violates a statute, is gained through inequality of
bargaining power, or is contrary to a substantial public interest.” Fortson v.
McClellan, 131 N.C. App. 635, 636, 508 S.E.2d 549, 551 (1998). The Court
agrees with the Magistrate Judge’s assessment that the Defendants’
characterization of the public interest implicated by this case is overly
expansive. The Court declines to interpret the public policy of North Carolina
so broadly as to prohibit the enforcement of an exculpatory clause provision
executed in the midst of a voluntary and arms-length transaction to procure
financing for an investment property. See Andrews v. Fitzgerald, 823 F.Supp.
356, 378 (M.D.N.C. 1993) (noting that North Carolina courts have found a
“substantial public interest” present only with waivers of liability for physical
Furthermore, the “unequal bargaining power” claimed by these
Defendants is lacking. These Defendants “were free to have made other
investment decisions or to have elected not to invest at all” in their Lots, and
they have failed to establish that they were unable to obtain financing from
other lenders. Id.
As the Magistrate Judge correctly noted, the Defendants “have not
provided the Court with any legal authority suggesting that North Carolina
courts would invalidate such a contract based on the public policy exception.”
[Doc. 36 at 29]. The Defendants still have not done so. Accordingly, the
Defendants’ objection is overruled, and all counterclaims of Patricia Tracy,
Gerald Abatemarco, and James Karp are hereby dismissed.
Having conducted a de novo review of those portions of the
Memorandum and Recommendation to which objections were filed, the Court
concludes that the Magistrate Judge’s proposed conclusions of law are
supported by and are consistent with current case law.
Accordingly, IT IS, THEREFORE, ORDERED that the Plaintiff’s
Objections to the Memorandum and Recommendation of the Magistrate
Judge [Doc. 41] is OVERRULED; the Defendants’ Objections [Doc. 43] are
OVERRULED; and the recommendation of the Magistrate Judge [Doc. 36] is
IT IS FURTHER ORDERED that the Plaintiff’s Motion to Dismiss [Doc.
31] is GRANTED IN PART and DENIED IN PART as follows:
The Motion to Dismiss is GRANTED with respect to the
Counterclaims asserted by Defendants Patricia Tracy,
Counterclaims are hereby DISMISSED;
The Motion to Dismiss is further GRANTED with respect to
all of the Defendants’ Counterclaims arising under the ILSA
and the North Carolina Mortgage Lending Act and for
negligent misrepresentation, and these claims are hereby
The Motion to Dismiss is DENIED with respect to the
Counterclaims for fraud and unfair and deceptive trade
practices asserted by Defendants G. Daniel Siegel, The
Karp Family Limited Partnership, Barron S. Wall, Kevin J.
Tracy, Anthony J. Barbieri, 3GMA Realty, LLC, Gregory S.
Keary, Benjamin W. Atkinson, Daniel S. Hinkson, and
Katherine H. Williams.
IT IS FURTHER ORDERED that the parties shall conduct an initial
attorneys’ conference within fourteen (14) days of the entry of this Order and
shall file a Certificate of Initial Attorneys’ Conference within seven (7) days
Signed: August 15, 2012
IT IS SO ORDERED.
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