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May
2007
Adding Description Post-Closing Invalidates
Mortgage
By
Chris Burti, Vice President and Legal Counsel, Statewide
T
itle, Inc.
In
Re: Hudson,
NO. COA06-345, filed on April 3, 2007 may very well prove to be a ‘must
read’
decision for real property practitioners.
T
he North Carolina Court of Appeals affirmed the decision of the Superior Court
invalidating a deed of trust due to description issues in a de
novo hearing on the appeal of the ruling of the Clerk of Superior Court in a
foreclosure proceeding. A review of the decision followed by a discussion of the
ramifications may prove interesting.
In 1996, the Hudsons (respondents) borrowed $232,610.96 from
T
ransamerica Financial Services (
T
ransamerica).
T
ransamerica was succeeded in interest by Beneficial Mortgage Company of
North America
(Beneficial).
T
he Court refers to both as “petitioner.” Respondents executed a promissory
note that provided that the loan was secured by specific real property.
T
hey also executed a deed of trust securing the loan with real estate listed on
an “Attachment A”
to the deed of trust.
T
he note listed four typed addresses and four handwritten addresses as
collateral. According to the opinion, Attachment A to the deed of trust
described six parcels:
PARCEL
I: Being all of Lot 10, Block A, Section 2, of
Echo
Heights
as recorded in Book of Maps 1955, Page 113, Wake County Registry.
T
ax Map No.: 680-0458
PARCEL II: Being all of Lot 12, Block A Section 2, of
Echo
Heights
as recorded in Book of Maps 1955, Page 113, Wake County Registry.
T
ax Map No.: 680-0460
PARCEL III: Being all of Lot 139, Fisher Heights Subdivision, as shown on map
entitled “Fisher Heights”, as recorded in Book of Maps 1920, Volume 3, Page
178, Wake County Registry.
T
ogether with improvements located thereon; said property being located at
104 Lord Anson Drive
,
Raleigh
,
NC
.
PARCEL IV: Being all of Lot 10 of Brown-Birch Apartments as depicted in Book of
Maps 1985, Page 1148, Wake County Registry. 1212 Angelus Drive Raleigh, North
Carolina
PARCEL V: BEING ALL OF Lots 140 and Part of Lot 141, Fisher Heights Subdivision,
as shown on plat recorded in Book of Maps 1990, page 154, Wake County Registry.
Said plat is a recombination of Lots 140 and Part of Lot 141 as shown in plat
recorded in Book of Maps 1920, Page 178, Wake County Registry to which reference
is also made.
T
ogether with improvements located thereon; said property being located at
106 Lord Anson Drive
,
Raleigh
,
North Carolina
.
PARCEL VI:
BEING all of
Lot
83, Foxcroft Subdivision, Section 3, as recorded in Book of Maps 1971, Page
496, Wake County Registry.
T
he Court recited the following facts: “Mr. Hudson testified that at the real
estate closing for this transaction he did not execute any documents that
included the ‘
Woodland Road
properties as security interest for the loan.’
T
he deed of trust that he signed did not include an Attachment A, and the
Hudsons
had never contemplated or discussed using the
Woodland Road
properties as security interest.
T
hose properties were sold one month later, as the
Hudsons
had anticipated at the time of the transaction. Mr. Hudson testified that he
‘was not given any documents at closing. [He] received them maybe two to three
weeks later in mail. [He] should have been given documents, but [he] was not
given documents.’ Mr. Hudson further testified that the note he signed ‘had
[the] prepayment notice struck out and [was] initialed by the loan officer.
T
he
Woodland Road
properties were not included at the time of closing.
T
hey were added later without my consent or knowledge.’ He then stated that the
deed of trust offered by petitioner was not ‘what [he] signed and does not
bear [his] signature.’”
T
he dispute arose when the respondents made a
payment of almost $50,000 on their loan after selling the
Woodland Road
properties. Respondents subsequently discovered that most of the payments had
been applied to a prepayment penalty. Respondents made calls and sent numerous
letters and faxes requesting copies of the loan documents and explanations for
petitioner's actions. After some delay, they finally received copies of the
purported loan documents and discovered that they were not the ones they had
signed. Petitioner was viewed as being unresponsive to Respondents' attempts to
clear up the matter.
In
2004, petitioner notified respondents that they were in default and that failure
to cure would result in acceleration of the debt and foreclosure of the deed of
trust. Respondents responded by demanding cancellation of the note and deed of
trust and a refund of their monies due to the fact that the instruments were not
those signed by respondents. Petitioner commenced a foreclosure proceeding on
the six properties listed on Attachment A of the note. At the foreclosure
hearing, the Clerk of Superior Court for
Wake
County
issued an order of sale for the properties on
Lord Anson Drive
,
Angelus Drive
, and
Edington Lane
.
T
he Clerk declared that, “the Debtors have demonstrated a valid legal reason
why foreclosure should not proceed” as to the
Woodland Road
properties. Respondents appealed the Clerk’s order and the Superior Court
dismissed petitioner's foreclosure petition on all of the properties, resulting
in the instant appeal.
N.C.G.S. Section 45-21.16(d) requires that:
(d) . . . the clerk shall consider the evidence of the parties and may consider,
in addition to other forms of evidence required or permitted by law, affidavits
and certified copies of documents. If the clerk finds the existence of
(i)
valid debt of which the party seeking to foreclose is the holder,
(ii)
default,
(iii)
right to foreclose under the instrument, and
(iv)
notice to those entitled to such under subsection (b), then the clerk
shall authorize the mortgagee or trustee to proceed under the instrument . . . .
N.C.G.S.
Section 45-21.16(d1) provides that:
(d1)
T
he act of the clerk in so finding or refusing to so find is a judicial act and
may be appealed to the judge of the district or superior court having
jurisdiction at time within 10 days after said act. Appeals from said act of the
clerk shall be heard de novo.
Petitioner argued that the trial court erred by disallowing the foreclosure
because the deed of trust satisfied the Statute of Frauds and the trustee
presented sufficient competent evidence to satisfy the required four findings.
T
he Court also noted that “Petitioner argues that by considering respondents'
evidence of petitioner's alleged fraudulent acts, and then making findings and
conclusions of law in relation to those acts, ‘the trial judge exceeded both
his statutory jurisdiction and the scope of inquiry permitted in the context of
a hearing conducted pursuant to N.C. Gen. Stat. § 45-21.16 by invoking
equitable jurisdiction.’”
T
he Court of Appeals disagreed noting that the
North Carolina Supreme Court has held “that determining which property is
legally secured by a deed of trust is a proper issue and element of proof before
the Clerk of Superior Court.
T
herefore, if a party contends that the property is not secured,” as the
respondents contend in this case “then such contention may be raised as a
defense to the four requisite findings under N.C.G.S. § 45- 21.16(d).” In re Foreclosure of Michael Weinman Associates, 333 N.C. 221,
(1993).
T
he Court of Appeals opinion elaborates that “this Court has specifically held
that the forgery of loan documents is a proper legal defense to a lender's
assertion that a ‘valid debt’ exists.
Espinosa, 135 N.C. App. at 308, 520 S.E.2d 108 at 111.”
T
his makes it clear that an examination of the underlying validity of the loan
documents relates to the finding of a “valid debt” under North Carolina
General Statutes section 45-21.16 and even though based in accusations of Fraud,
is nonetheless a “legal” issue rather than an equitable one.
Of
particular interest to real property professionals should be the way in which
the Court dealt with Petitioner’s objection to the trial judge's conclusion
that “[s]ince the Deed of
T
rust executed by Will and Betty Hudson contained no description of real
property, it does not meet the provisions of the Statute of Frauds and is
void.”
T
he Court cites established case law showing that is axiomatic that a conveyance
must include an adequate description of the land or a reference to something
extrinsic that will render a certain description of the locus
in quo. Here, the Court determined that the deed of trust did not include a
description of the real property at the time respondents executed the
instrument.
T
he Court of Appeals properly accepts the Superior Court’s finding that the
description was later added to the deed of trust without the knowledge or
consent of the respondents. Petitioner apparently argued that the documents the
respondents did sign made it clear that they intended to convey the four parcels
of land as security for their loan, and that was sufficient to satisfy the
Statute of Frauds.
T
he Court of Appeals did not find these
arguments persuasive. While it was clear that the respondents intended to convey
some real property as security for their loan, the fact that the deed as
recorded includes the missing legal descriptions of the property is not legally
sufficient to convey the legal interest to the trustee.
T
he petitioner cited “Board of
T
ransportation v. Pelletier, 38 N.C. App. 533, 248 S.E.2d 413 (1978), for the
proposition that ‘in construing a recorded deed, deed of trust, or any other
conveyance of real property, courts effort to determine the intent of the
parties to the instrument from an inspection of the language within the “four
corners” of the recorded instrument itself.’”
T
he Court distinguished the holding in Pelletier
noting that “the trial judge, who was not conducting a hearing pursuant to
N.C. Gen. Stat. § 45-21.16, had before him an instrument whose validity was not
in question. Rather, the judge's sole purpose was to determine who owned a
particular parcel of land by construing the deed description.
Id.
at 536-37, 248 S.E.2d at 415. In
contrast, the superior court judge in this case had to determine whether
foreclosure was proper when the supporting documents themselves were
contested.”
One
concern with this decision is that it appears that the trial court and the Court
of Appeals may be understood to have gone further than they appear to have
actually gone with this decision.
T
he logic of the Court with regard to the penciled in references and added
descriptions is inescapable and one upon which we always counsel caution. It is
unreasonable to expect a court to enforce an instrument, the validity of which
is contested and in which the party seeking enforcement subsequently adds
essential terms.
T
he clerk in this matter apparently recognized that the note referenced in the
deed of trust contained typed information that arguably indicated an intent to
encumber those four identifiable tracts at a minimum.
T
his case should not be construed as holding that an address is an insufficient
description.
T
he opinion is not perfectly clear, but it appears that there was no reference in
the deed of trust that the note contained any descriptive information and we
surmise that there was only the typical identifying information of the secured
note. Had the deed of trust made explicit reference to descriptive information
being found on the note, this opinion would be troubling. It is fair to infer
that descriptive information that is referenced on a note that is, itself,
referenced will not by that reference constitute a sufficient description.
We
anticipate that the practical manifestations of this case will present
themselves in different contexts and we would like to address two of those. It
has become the prevalent practice in this State to place property descriptions
on exhibits that are attached to deeds, deeds of trust and other conveyances. It
will be imperative after this opinion that such description exhibits be prepared
and be attached to all conveyances prior to or at the time of execution. Many
years ago it was the common, if not the universal, practice for attorneys to
secure the initials of the parties executing important documents on each page of
the instrument.
T
his case should lead attorneys to consider having these exhibits initialed in
like manner as evidence of meeting the requirements for validity.
T
he second area that we expect to see an impact
will involve re-recording corrected instruments. Many real estate practitioners
assume that where a deed of trust references an attached description exhibit and
it turns out not to be attached upon recording, that it is an acceptable
practice to re-record the instrument with the description attached pursuant to
N.C.G.S. Section 47-365.1.
T
he statute does not give guidance as to what constitutes an “obvious” error,
however Green v. Crane, 96 N.C.App.
464 (1990) has shown us that an omitted description should not be considered as
being within the purview of the statute. In
Re:
Hudson
lends ammunition to the argument to the implications of Green as being a prohibition of the practice if the attachment is
necessary to the validity of the conveyance. We can infer that the error should
be obvious on its face or, at the very least, should not change the obligations
of the grantor before the statute should be used. Where the instrument contains
information on its face that is sufficient to describe the property, the
attachment is arguably surplusage and re-recording with the attachment would be
harmless clarification.
T
he practice of re-recording conveyances pursuant to N.C.G.S. Section 47-365.1 as
a result of description errors should always be considered judiciously and if
title insurance is involved, a consultation with underwriting counsel
recommended.
Dirt
Tales From
The Deed Vault
By
John Dillard
, Vice President and Legal Counsel
Statewide
Title Exchange Corporation
In
the continuation of claims prevention, Statewide
Title looks at another situation this month that raises the question of whether a
title claim might have been prevented.
Attorney "A" was contacted by a real estate developer
"D" to handle a closing for a prospective purchaser to whom D was
selling.
T
he developer stated that he was looking for an attorney to represent him for
what would amount to a large number of transactions over the upcoming two years.
He even hinted that he would be able to steer the closings on the buyer's
side to A since he was paying for a part of the closing costs as a part of an
incentive to buy in his development, Verde Acre.
A agrees to do the closing. A
examines the title to the development in order to build a base file since he
anticipates doing a number of closings. A
notices from her title examination there is a deed of trust that covers all of
Verde Acre, but that there are also a number of releases on record.
A informs D that she has found the existing deed of trust and will
contact the bank to see how much the bank will need to release the proposed
buyer's tract from their mortgage. D
tells A not to bother that he has a standing agreement with the bank and that
the releases are taken care of outside the closing and filed by the bank.
A goes ahead and schedules the closing, prepares all the other necessary
documentation and obtains a title insurance commitment for the buyer.
The closing is held on the date scheduled and everything goes very smoothly.
A is sure she has convinced D and the buyer that she has done a great job
and she is looking forward to doing more closings that D sends her way.
A month or so passes without A hearing anything from D.
A has gotten busy with other matters and has forgotten about D for the
time being. It's not until she is
doing a bring down for recording that she notices a number of deeds from D that
have been recorded since her closing with him.
And she also notices that each of these deeds was prepared by a different
attorney. It seems on each
transaction D has sought and obtained a new lawyer.
"He must be extremely hard to please" was all A thought.
A few months later the client that A did the closing for at developer D's
request shows up in her office one day, visibly upset because her property has
just been served with a notice of foreclosure.
Thinking this must be a mistake A goes to the courthouse to look in the
foreclosure file. What she discovers
is that developer D has fled to parts unknown and service was being obtained by
posting the property. Still A feels
her client will be fine because they obtained a release for their property.
As it turns out all the releases that had been placed on record by D had
been forged. Luckily, the buyer had
title insurance.
Was there any way A could have prevented this claim from occurring?
There were some warning signs to which she should have paid closer attention.
First, any time a client does not want the closing attorney to be
involved in the payoff or release of an existing mortgage of record should throw
up a red flag. In this instance, a
simple phone call to the bank to verify that the release was being prepared and
would be ready for the day of closing would have been very helpful in this
matter.
Second, the fact that each deed from the developer had been drafted by a
different attorney should have raised suspicions on A's part.
In conducting her title examination, A should have paid closer attention
to the previous deeds in the chain of title conveyed by the developer.
This in conjunction with the fact that the developer insisted on taking care of
the release deed should have been enough to raise a red flag.
Too often matters look crystal clear in hindsight, but all too often clues are
right in front of us that would prevent a claim from happening if only we had
slowed down and paid a bit more attention to what was before us.
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