E-Alert Case Updates

Fourth Circuit Affirms Summary Judgment In Dispute Over Seller Holdback Agreement

Dreamstreet Investments, Inc. v. MidCountry Bank
No. 15-2104, (United States Court of Appeals for the Fourth Circuit, November 30, 2016)
by Caroline E. Willsey, Law Clerk
Semmes, Bowen & Semmes (www.semmes.com)

Available at: http://www.ca4.uscourts.gov/Opinions/Published/152104.P.pdf

In Dreamstreet Investments, Inc. v. MidCountry Bank, No. 15-2014, the U.S. Court of Appeals for the Fourth Circuit considered a grant of summary judgment by the U.S. District Court for the Middle District of North Carolina.

Jason Pittman (“Pittman”), through his company Dreamstreet Investments, Inc. (“Dreamstreet”), entered into a purchase agreement to sell an undeveloped lot to Carl Ingraham (“Ingraham”) for $115,000. Ingraham applied for an owner-builder loan from MidCountry. Under MidCountry’s underwriting standards, Ingraham was required to make a down payment of approximately $43,000 qualify for the loan. Ingraham was unable to meet the down payment, so Dreamstreet and MidCountry entered into a seller holdback agreement. Under the Agreement, MidCountry would retain the down payment to ensure that Ingraham had sufficient funds to complete his home. Upon completion of the home, the money would be released to Dreamstreet.

Additional terms of the seller holdback agreement were memorialized in an email sent by Pittman on June 12, 2008, which acknowledged that the $43,000 would not be distributed to Dreamstreet if Ingraham defaulted on his MidCountry loan or failed to complete construction. One (1) week later, Ingraham and Dreamstreet executed a promissory note, secured by a deed of trust, and closed on the sale of the lot.

One (1) year later in June 2009, Pittman demanded release of the $43,000 from MidCountry, challenging the validity of the seller holdback agreement. This demand was followed up by threats to report MidCountry to the North Carolina Banking Commission and to file a lawsuit. Four (4) years passed and Dreamstreet failed to follow through on its threats. In that time, Ingraham defaulted on its loan with MidCountry. On March 30, 2012, MidCountry foreclosed on Ingraham’s home. Dreamstreet did not assert any security interest in connection with the foreclosure, despite the fact that its promissory note against Ingraham was secured by a deed of trust on the property.

Finally, on June 28, 2013, Dreamstreet filed suit against MidCountry, alleging that MidCountry fraudulently induced it to enter into the seller holdback agreement and never intended to release the $43,000 holdback. Dreamstreet brought claims under North Carolina’s Unfair and Deceptive Trade Practices Act (UDTPA) and for common law constructive fraud. MidCountry moved for summary judgment, claiming that Dreamstreet’s UDTPA claims were barred by a four (4)-year statute of limitations and that Dreamstreet’s constructive fraud claim failed as a matter of law because Dreamstreet could not show the required element of a fiduciary relationship between the parties.

The district court granted MidCountry’s motion for summary judgment. It agreed with MidCountry that the four (4)-year statute of limitations barred the UDTPA claim. On the constructive fraud claim, the district court concluded that because Ingraham defaulted on his loan, the seller holdback agreement’s conditions were not satisfied, and thus MidCountry did not breach any fiduciary duty it may have owed to Dreamstreet. Dreamstreet appealed.

First, Dreamstreet contended that the district court erred in holding that its UDTPA claim was time-barred. Under North Carolina law, UDTPA claims are governed by a four (4)-year statute of limitations. When a violation of UDTPA is based on alleged fraudulent conduct, the statute of limitations starts running at the time that the fraud is or should have been discovered. The parties dispute whether Dreamstreet discovered or should have discovered the fraud of which it complains more than four (4) years before it filed suit. Dreamstreet argued that it could not have known that MidCountry did not intend to honor the seller holdback agreement until 2009, when Ingraham completed his home and MidCountry was obligated to release the down payment funds. The Fourth Circuit pointed out that Dreamstreet’s position failed to account for the undisputed fact that on June 16, 2009 – approximately two (2) weeks outside the four (4)-year limitations period – Dreamstreet announced that it planned to sue MidCountry under the same claims that it advanced in the current litigation. At that point, Dreamstreet was clearly privy to information that led it to accuse MidCountry of fraud. Accordingly, the Fourth Circuit held that the district court properly granted summary judgment on the UDTPA claims to MidCountry on statute of limitations grounds.

Second, Dreamstreet alleged that the district court erred in granting summary judgment as to its constructive fraud claim. Under North Carolina law, the key element of a constructive fraud claim is a fiduciary relationship between the plaintiff and defendant. MidCountry argued that Dreamstreet could not show such a relationship, and the Fourth Circuit agreed. In North Carolina, a fiduciary relationship is characterized by “confidence reposed on one side, and resulting domination and influence on the other.” Parties to a contract – like Dreamstreet and MidCountry – are not fiduciaries because what the parties owe to each other is governed by contract, with no “special duty of loyalty.” The contract between Dreamstreet and MidCountry was negotiated at arm’s length, between parties with equal bargaining power, with nothing to suggest that any special confidence.

Accordingly, the Fourth Circuit affirmed the judgment of the district court and summary judgment was upheld in MidCountry’s favor.