Forfeiture of Real Property, Lis Pendens and Forfeiture Judgements
Ed Urban, Vice President and Corporate Counsel

The subject of forfeiture of real property, particularly under Federal law, is an exhaustive one. A very common type of forfeiture is civil forfeiture pursuant to 21 U.S.C. Sec. 881. In United States v. 92 Buena Vista Avenue, 507 US 111, 113 S.Ct. 1126, 122 L. Ed. 2d 469 (1993), the court held that the "innocent owner defense" in 21 U.S.C. Sec. 881(a) prevails over the "relation-back" of forfeiture rule in 21 U.S.C. Sec. 881(h). However, United States v. Colonial National Bank, N.A., 74 F. 3d 486 (U.S.C.A., 4th Cir. 1996) adds another wrinkle. The facts were as follows:

A forfeiture proceeding was commenced by the United States but no notice of lis pendens was filed. The proceeding resulted in a judgment of forfeiture being entered in Federal District Court on January 16, 1992. The bank recorded its deed of trust from the "owner" on April 29, 1992. The Court held that the government had no duty under the forfeiture statutes or under 28 U.S.C. Sec. 1964 to file a notice of lis pendens in the land records of where the (Maryland) real property was located. The Court noted that the problem with the bank's position was that, in 92 Buena Vista, the Supreme Court specifically held that at the time of the order of forfeiture, all interest in the property vests in the United States and relates back to the illegal act's commission. Note that the "innocent owner defense" did not work for the bank because the bank's deed of trust was recorded after the entry of the judgment of forfeiture -- not merely after the illegal act but before the entry of judgment. Finally, in a footnote, the Court noted:

"We are aware of the force of arguments to the effect that decisions such as this one with respect to forfeiture are bound to have a potential adverse effect on land titles because they are given effect without recording under state recording statutes. Congress might change this rule, but we are not at liberty so to do."

28 U.S.C. Sec. 1964, cited in the opinion, provides that where state law requires notice of an action concerning real property to be recorded, notice of a pending action must be recorded "to give constructive notice of the action...."

It is noted that the law of lis pendens in North Carolina (G.S. 1-116, et seq.), is not a rule of priority. The result of lis pendens is that a party taking and recording an interest in the real property subsequent to the recording and indexing of a lis pendens is bound by the outcome of the action as if he were actually a party to the action. G.S. 1-118. However, priority is not altered by G.S. 1-116 et seq. (G.S. 44A-13(c) pertaining to "mechanics' liens" constitutes an exception to this comment regarding priority.)

It is noted that, frequently, the government will file a notice of lis pendens. But, under the law of this case, the government need not do so. It is also noted that in "STANDARD EXCEPTIONS," Item 7 of the N.C. Bar Association Form 1-P ("Preliminary Opinion on Title") and in the Standard Exceptions in Statewide Title’s forms, "federal judgments" and "proceedings filed only in Federal Court" are not covered by the basic title opinion.

Since August 1, 1990, North Carolina has had the "Uniform Federal Lien Registration Act," G.S. 44-68.10, et seq. The law applies to certain specified liens and "to other federal liens notices of which under any Act of Congress or any regulation ... are required or permitted to be filed" in the same manner as federal tax liens. G.S. 44-68.11. If the act applies, a lien must be filed in the Clerk of Superior Court's office in the county where the real property is located. G.S. 44-68.12(b). 21 U.C.S. Sec. 881 does not expressly require or permit a judgment of forfeiture to be filed pursuant to G.S. 44-68.12(b). So, arguably, G.S. 44-68.12(b) is of no help.

The ALTA Loan Policy (1992) contains "Exclusions From Coverage." Arguably, Exclusion 1(a) or Exclusion 1(b) would exclude such a forfeiture judgment except to the extent that notice is recorded in the "public records" at Date of Policy. 1(f) of the Conditions and Stipulations of the policy defining "public records" includes state records that impart constructive notice. 1(f) includes environmental protection liens filed in the records of the Clerk of the U.S. District Court in the policy's definition of "public records." In one unpublished opinion, one Florida Court agreed with the title insurer's argument that the filing of a forfeiture by the United States is an exercise of police power and is within Exclusion 1(b). Estate Home Builders, Inc. v. Attorneys Title Insurance Fund, Inc. Case No. 90-35325(12) (Cir. Ct., 17th Judic. Circ., Broward Co., Fla. 1991). According to the opinion, the following cases state that exercise of forfeiture is exercise of police power. Huron Cement Co., v. Detroit, 362 U.S. 440, 80 S. Ct. 813, 4 L. Ed. 2d 852 (1960); United States v. One 1952 Ford Thunderbird, 232 F. Supp 1019 (N. D.Ill. 1964); United States v. Gulfstream W., 2600 Harden Blvd., Lakeland, 17 F. Supp. 792 (S. D. Fla. 1989). See also United States v. Gaffney, 10 F. 2d. 694, at 696 (2d Cir. 1926); Oklahoma City v. Sanders, 94 F 2d. 323 at 327 (10th Cir. 1938); Federal Power Commission v. Natural Gas Pipeline Co., 315 U.S. 575, 62 S. Ct. 737, 741, 86 L. Ed. 1037 (1942). See Urban & Whitney, North Carolina Real Estate, Sec. 15-10 (Harrison Co. 1996).

In North Carolina, the author's experience has been that the U.S. will file a notice of lis pendens in the clerk of superior court's office and in the register of deed's office. The register of deed's office indexes the filing under the name(s) of the owner(s) of the land. Therefore, this problem should not surface in North Carolina. However, the law should be changed (and so should the title insurance policy). U.S. attorneys are urged to continue the excellent practice noted in this paragraph.

Let us have your views of this troubling area of the law. We are continuing to research this area. We have brought this case to the attention of title insurers. We will be doing a follow up article as we continue our review of this issue.

Proposed Amendments to the Cancellation Statute
Chris Burti, Vice President and Counsel

The 1996 short session of the Legislature is expected to consider an amendment to G.S 45-37 the primary objective of which is to bring back cancellation by exhibition and to correct the lack of a line for the date of satisfaction on the statutory form for the affidavit of lost note under G.S. 47-46.3. The proposed amendment resurrecting exhibition cancellation would require that the endorsement of satisfaction on the original instrument contain a statement of ownership by the endorser. Additionally, the amendment, if adopted, would eliminate the responsibility of the Register of Deeds to ascertain the authority of the endorser as was the case under the repealed provisions of the old statute.

The 1995 amendment coupled with the proposed 1996 changes should facilitate cancellation and ease the difficulties created by the increased difficulty in tracking documents in today’s business environment. Additionally, the new amendment will restore the language permitting cancellation of an instrument that secures performance of an obligation other than a note. However, the practical effect will be, ultimately, that cancellations will simply be an administrative and non-discretionary process. There will be no requirement that the satisfaction be made by the proper party but rather that the correct form of satisfaction be used and any documents required to be acknowledged are done so properly. Such is presently the case with deeds where the Register of Deeds is required to pass on the proper acknowledgment of an instrument but not whether the grantor actually owns the interest conveyed. This is not a problem under the Conner Act but G.S. 47-17.2 codifies the rule that an assignment of a deed of trust need not be recorded.

While time and space considerations require us to postpone a discussion of the case law until a future article, suffice it to say that, our appellate courts have ruled that in limited circumstances a cancellation may not always be relied upon and the statute itself does not speak to the effect of cancellation. We have a concern for the potential for an adverse decision under the new statute as it exists and more so if the proposed amendment passes. A party without any authority, apparent or otherwise, can cancel a deed of trust with or without the original instruments under the statute as proposed. It would seem likely that our courts would rule that such a cancellation is not effective and cannot be relied upon in the right fact situation ( such as where a recorded assignment exists and the assignor cancels ).

Because of this concern we have suggested to Bill Campbell, of The Institute of Government, that the amendment include the following language;

"When an instrument is canceled of record pursuant to this Article the cancellation shall be deemed effective unless the party relying on the cancellation shall have prior actual knowledge of fraudulent, improper or unauthorized cancellation."

Bill has been instrumental in working on the draft of the proposed amendment and should be contacted if you have concerns regarding the changes. From an underwriting perspective we are taking the position that, unless the title examiner has knowledge of or suspects an improper cancellation, the cancellation of record is just that and may be relied upon.