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December
2006
2006 Instantaneous Se
isin Case
By
Chris Burti, Vice President and Legal Counsel, Statewide
T
itle, Inc.
West
Durham Lumber Company v. Meadows,
No. COA05-1181, filed on 5 September 2006 is a decision that should be of
interest to real property practitioners.
T
he case provides guidance on the outcome of competing liens with bifurcated
priority based upon the doctrine of instantaneous seisin as established under
the doctrines set forth in Dalton Moran
Shook Inc. v. Pitt Development Co., 113 N.C. App. 707, 440 S.E.2d 585
(1994).
T
his Court summarized the
Dalton
doctrines as follows.
“Our
jurisdiction recognizes that ‘[t]he doctrine of instantaneous seisin is a
legal fiction which provides that when a deed and a purchase money deed of trust
are executed, delivered, and recorded as part of the same transaction, the title
conveyed by the deed of trust attaches at the instant the vendee acquires title
and constitutes a lien superior to all others.’
Dalton
, 113 N.C.App. at 712, 440 S.E.2d at 589 (citing Supply Co. v. Rivenbark, 231 N.C. 213, 56 S.E.2d 431 (1949). It is
well established that “'a deed and a mortgage to the vendor for the purchase
price, executed at the same time, are regarded as one transaction.'”
Id.
(quoting Supply Co., 231 N.C. at 214,
56 S.E.2d at 432). “
T
he title does not rest in the vendee but merely passes through his hands, and
during such instantaneous passage no lien against the vendee can attach to the
title superior to the right of the holder of the purchase money mortgage.”
Id.
(citing Supply Co., 231 N.C. at 214,
56 S.E.2d at 432). Pursuant to this doctrine, a previously existing
materialmen's lien would be subordinated to the lien of the purchase money deed
of trust. Id. (citing Carolina
Builders Corp. v. Howard-Veasey Homes, Inc., 72 N.C. App. 224, 324 S.E.2d
626, disc. review denied, 313 N.C. 597, 330 S.E.2d 606 (1985)).
T
he doctrine is “equally applicable where a third party loans the purchase
price and accepts a deed of trust to secure the amount so loaned.” Slate
v. Marion, 104 N.C. App. 132, 135, 408 S.E.2d 189, 191 (quoting Pegram-West,
Inc. v. Hiatt Homes, Inc., 12 N.C. App. 519, 525, 184 S.E.2d 65, 68 (1971)),
disc. review denied, 330 N.C. 442, 412
S.E.2d 75 (1991).”
West Durham
involves a determination of the priority between the security interests of a
materialmen's lien and a construction loan and purchase money Deed of
T
rust on a lot and the resulting effect of a foreclosure of the Deed of
T
rust upon that priority.
T
his appeal arose from the trial court's entry of summary judgment, granting West
Durham Lumber Company (“plaintiff”) a judgment of lien enforcement in the
amount of $77,625.51 plus post-judgment interest.
In 2003, the defendant arranged with potential homeowners to build a house on
the lot in issue in this case.
T
he defendant was to purchase the lot and CCB agreed to finance the purchase and
construction by the defendant. On March 18, 2003, the plaintiff first furnished
materials to the lot. On March 25, 2003, Meadows executed a deed of trust in
favor of CCB, and recorded the deed (executed on March 7, 2003) from the seller
and then recorded the deed of trust in favor of CCB the next day. CCB closed the
loan, and made an initial advance of $112,000.00 to the defendant, which was
used to pay for the lot purchase.
T
he deed of trust provided that $112,000.00 of the loan was secured by the
Property.
T
he deed of trust also secured additional obligatory advancements to the
defendant, which when added to the purchase price, totaled $560,000.00.
T
he plaintiff last furnished materials on July
11, 2003 and the defendant subsequently defaulted on the deed of trust. CCB
began foreclosure on August 12, 2003, having advanced $524,000.00 to Meadows.
T
he total indebtedness as of the time of foreclosure, including interest, was in
excess of $527,000.00. CCB purchased the property at the foreclosure sale for
$425,000.00.
Of
some additional interest is that the facts outlined in the Court of Appeals’
opinion indicate that the plaintiff filed a claim of lien claiming $77,625.51
plus interest and attorneys' fees on October 14, 2003 but, that the plaintiff
had already brought the action to enforce the claim of lien on October 6, 2003.
Both plaintiff and defendants filed motions for summary judgment.
T
he Court of Appeals determined that the plaintiff had a valid and enforceable
lien that related back to March 18, 2003 and prior to the recording of the Deed
of
T
rust. While the Court did not address whether the timing of the claim and action
were in issue, the statutes cited do not seem to require that they be done in
any particular order. “Claims of
lien on real property may be filed at any time after the maturity of the
obligation secured thereby but not later than 120 days after the last furnishing
of labor or materials at the site of the improvement by the person claiming the
lien.” N.C. Gen. Stat. 44A-12(b) (2005).
In
West Durham the Court of Appeals
applied the doctrine of instantaneous seisin and the holding in Dalton Moran Shook Inc. v. Pitt Development Co. to determine that
the trial court had erred in granting summary judgment in favor of the
plaintiff.
T
he plaintiff did not argue that the execution, delivery, and recordation of the
deed and deed of trust were not part of one transaction.
T
he plaintiff contended that the doctrine of instantaneous seisin is an
affirmative defense that must be pleaded and had not been.
T
he Court said: “N.C. Gen. Stat. § 1A-1, Rule 8(c) (2005).
T
his jurisdiction has not extended the affirmative defense of avoidance to
include the doctrine of instantaneous seisin, and we decline to do so in this
instance.”
T
he Court noted that
Dalton
carved out an exception to the application of the doctrine of instantaneous
seisin. In
Dalton
, the deed of trust secured the purchase price of the property and additional
obligatory construction advances.
T
hat Court determined that “if the doctrine is applicable where the deed of
trust securing the purchase price also secures additional advancements for
development or construction purposes, a materialmen's lien should be
subordinated to the deed of trust only to the extent that it secures the
purchase price.”
T
he Court of Appeals summarizes the effect such
that “when a loan is made to both purchase the property and to develop the
property, the doctrine of instantaneous seisin only applies to protect the
amount used to purchase the property.
Id.
T
herefore, a deed of trust securing the purchase price of property as well as
construction or development loans is superior to a previously existing
materialmen's lien only to the extent
that the deed of trust secures the purchase price of the property.” In this
case the defendant applied $112,000.00 of the loan from CCB to the purchase
price of the lot.
T
he Court ruled that this $112,000.00 of the loan is protected by the doctrine of
instantaneous seisin, and has priority over the existing materialmen's lien of
the plaintiff. As the balance of CCB's loan was not used towards the purchase of
the property, it was not protected
by the doctrine of instantaneous seisin.
T
he plaintiff's materialmen's lien was junior
only to the portion of CCB's portion of the deed of trust which was used to
purchase the property. However, the Court ruled that when CCB foreclosed the
Deed of
T
rust, the foreclosure sale extinguished the materialmen's lien that was junior
to the loan for the purchase money. “
T
hus, as plaintiff's materialmen's lien was extinguished upon the foreclosure
sale, plaintiff was then required to initiate a claim upon surplus funds from
the foreclosure sale that were received in excess of CCB's initial $112,000.00
loan amount. When a claim of lien has been filed pursuant to section 44A-12, and
surplus funds exist from the foreclosure sale of the encumbered property, the
surplus funds stand in place of the encumbered property. Lynch v. Price Homes, Inc., 156 N.C. App. 83, 86, 575S.E.2d 543, 545
(2003) (citing Merritt v. Edwards Ridge,
323 N.C. 330, 335, 372 S.E.2d 559, 563 (1988)). An individual claiming a lien
upon surplus funds “must meet the requirements of [section] 44A-13 to enforce
a perfected lien on the surplus funds, in the same manner required to enforce a
perfected lien against the property.”
Id.
In addition, “Any surplus remaining after the application of the proceeds of
the sale as set out in subsection (a) shall be paid to the person or persons
entitled thereto, if the person who made the sale knows who is entitled thereto.
Otherwise, the surplus shall be paid to the clerk of the superior court of the
county where the sale was had.”
T
he Court determined that the plaintiff should
have filed a claim notice with the clerk of court in order to claim a right to a
portion of the surplus funds from the foreclosure sale. Having failed to do so,
the “plaintiff failed to take the steps necessary to perfect its claim to the
surplus proceeds which resulted from the foreclosure sale.”
T
he court concluded in summary by holding that
the plaintiff had a valid claim of lien that attached on the lot on March 18,
2003. It concluded that this lien was superior to the portion of the lien of the
Deed of
T
rust that secured those proceeds from the loan that were not used to purchase
the lot.
T
he Court ruled that the plaintiff's lien was junior to the purchase money
portion of the lien of CCB's deed of trust. As a result, when CCB foreclosed,
the sale extinguished the plaintiff's materialmen's lien as it was junior to a
sale instituted to satisfy the purchase money loan. Since the plaintiff failed
to perfect a claim to the surplus proceeds from the foreclosure sale, it did not
have a valid lien upon those funds.
T
he Court held the trial court's entry of summary judgment in favor of plaintiff
was in error and remanded the case back to the trial court for entry of partial
summary judgment in favor of defendant on this issue.
T
his holding should have great significance for
those representing lenders and lien claimants in such circumstances when there
is a pending foreclosure. Because the foreclosure has the potential to cut off
all the lien claimants’ rights, they will likely make it a practice to file a
claim for surplus funds in all instances.
T
hat seems to be the implicit advice of this Court.
T
he more difficult task will be in advising lenders on how to structure their
bidding strategy. Bid too low and risk losing deficiency action rights or bid
too high and end up paying the lien claims.
T
he case does seem to settle the question of
title matters since it is clear that when the foreclosure commences, the lien
claimant must protect itself by insuring that a surplus over the purchase money
is generated and then perfecting its claims on those funds. As the
materialmen’s’ lien is cut off by the foreclosure, title is good in the
bidder as to this concern.
HAP’S
HOLIDAY
MESSAGE
BY Harold K. (HAP) ROBER
T
S, PRESIDEN
T
It
is hard to believe that we are at the end of yet another exciting year at
Statewide
T
itle.
T
hanks to you, our loyal clients, Statewide has been able to continue its growth
throughout
North Carolina
.
Statewide
is committed to providing “Quality and Service” in all that we do.
We are also constantly looking for ways to improve and expand services to
our customers.
In 2006 Statewide has:
·
Shortened our turn around time of Finals;
·
Expanded our
T
itle Max Online (
T
MO) making our Operations Department second to none;
·
Strengthened our communications capabilities through technology
expansions within the internet, mobile devices, enhanced e-mail and document
imaging;
·
Added two new offices located in
Asheville
and Morganton;
·
Expanded Statewide
T
itle Exchange Corporation (S
T
EC) to provide superior 1031 tax deferred exchange services to our clients in
North Carolina
and throughout the
United States
;
·
Added 1031 seminars to our Seminar Series;
·
Continued advancement with technological developments within our
Company.
Looking
to 2007, we are excited about:
·
A more aware consumer willing to choose services based on quality and
service;
·
T
he continued growth in
our technology department to serve our clients;
·
Having the opportunity to expand our
T
itle Max Online (
T
MO) internet based services to more clients.
Statewide
T
itle has never had a stronger or more competent staff.
Everyone on our
T
eam eagerly looks forward to being of continued service to you in 2007.
Many,
many thanks for the support you give to Statewide
T
itle. We appreciate your
loyalty and will work every day to earn it.
In
closing, we wish you a very safe and Happy Holiday Season and a prosperous New
Year.
Harold K. (Hap) Roberts, Jr.
President
Statewide
T
itle, Inc.
“Happy
Holidays”
MERRY
CHRISTMAS
From the
STATEWIDE
TITLE FAMILY
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