This month's edition of Dirt Tales examines a fact situation wherein a deed of trust was recorded without the benefit of a bring-down title examination.
Commercial Developer is getting a new loan and has put up as collateral tracts of land located in two counties. The loan closed on Friday, and the deed of trust was recorded in County A the same day. Also the same day, the bank disbursed the loan proceeds although the deed of trust had not been yet recorded in County B , a rural county some distance away. The following Tuesday the deed of trust had been returned from County A and it was sent to County B to be recorded. When the attorney brought the title down he discovered a lien had been filed of record the previous day, Monday. The attorney called the bank and advised them of the problem and was told to go ahead and record since they had "gap" protection.
What is this "gap" the banker was referring to and does it in fact afford the lender protection against this intervening lien?
In North Carolina any purchaser of value who records their instrument will have priority over all subsequent recorded conveyances regardless of whether that person has notice of any unrecorded conveyance. This concept is typically known as a Pure Race recording doctrine. In the majority of states this is not the rule.
Most states are what is known as Race Notice, which means that conveyances that get recorded first will have priority over subsequently recorded conveyances provided the prior conveyance was recorded in good faith without knowledge of the unrecorded conveyance. In those states the "gap" or the time period between the closing and recording is protected by the title insurance commitment so long as no knowledge of any other unrecorded instruments, judgments or liens exist. The risk that is presented to the title company in insuring this gap are that the grantor may sell or mortgage the property to another purchaser or lender for value without disclosing the unperfected interest or an intervening lien or encumbrance may be recorded, granting priority or, the grantor may file bankruptcy, whereupon the trustee may invoke the avoidance powers set forth in §544(a)(3)) of the Bankruptcy Code and set aside your conveyance or mortgage.
Because these risks are real and pose a substantial threat to purchasers for value as well as those holding security interests, it is imperative that the title be brought current before recording the deed or deed of trust. In fact, the Good Funds Settlement Act dictates this be done before the closing attorney may disburse closing proceeds.
The case of Hardy v. Fryer 194 NC 420 (1927), (applied in Terry v. Brothers Investment Co. 77 NC App 1 (1985) discusses the elements of applying notice requirements in a Pure Race jurisdiction and an exception that may be applied when the grantee does have notice of a prior encumbrance and their instrument is in fact made subject to that encumbrance. The principle set out in Hardy is not derived from a Race Notice application, but rather from the theory that a reference to a prior encumbrance in the grantee's instrument creates an equitable trust.