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Fountain Foundry, Inc. v. Wachovia Bank

A-2497-03T3 (N.J. Super. App. Div. 2005) (Unpublished)

LENDERS; APPRAISALS—Absent an expressed agreement, a borrower is not entitled to rely on an appraisal done for its lender’s benefit because ordinarily, there is no special relationship between a borrower and a lender.

Two borrowers bought three foundry (metal melting and molding) businesses located throughout the United States—including one in California and another in Colorado. The two borrowers acquired these businesses by securing loans from a single bank. As time passed, the Colorado business proved unprofitable and consequently needed constant funding from the other two businesses to keep it from going bankrupt. Thus, at the borrower’s request, the bank refinanced the original loans. This refinancing required the bank to perform new appraisals of the assets of the struggling Colorado business. The new appraisal resulted in significantly lower valuations of the Colorado business’s assets than the bank’s original 1998 appraisal. As a result, the borrowers claimed that the bank caused them to unjustifiably rely on an inaccurate appraisal when they decided to buy the Colorado business in 1998. On that basis, the borrowers sued the bank to recover all financing and refinancing fees incurred during its acquisition and running of the Colorado business.

The bank moved to dismiss the case and sought attorney’s fees from its borrowers. The Appellate Division affirmed the lower court’s granting of the bank’s motion to dismiss, holding that a lender-bank has no fiduciary duty to provide accurate appraisals to its borrowers when the lender-bank conducts such appraisals for the sake of its endorsement process. The Court based its affirmance on the fact that the two borrowers were savvy businessmen who owed it to each other to hire their own independent appraiser to evaluate the assets of the Colorado business before deciding to buy it; the bank had no duty to do this for them.

Additionally, the Court affirmed that the bank neither exercised bad faith nor engaged in fraud, contractual breach, negligent misrepresentation, or negligence when it supplied the borrowers with the initial appraisal in 1998. The borrowers showed no proof that the bank supplied them with false information when it made the initial appraisal, nor did the bank owe the borrowers a duty of care since no special relationship existed between the borrowers and the bank.

Finally, the bank was correctly denied attorney’s fees. The bank based its motion for attorney’s fees on a written contractual agreement which provided that the bank could collect attorneys’ fees incurred in order to collect or enforce obligations. This contractual provision did not apply to this case since attorneys’ fees incurred as a result of a suit brought by a borrower seeking to recover fees from his creditor-bank are not the same thing as attorneys’ fees incurred in order to enforce obligations.

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