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Issue  199  Article  333
Published:  8/1/2012

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Current Cases of Note Through July 15, 2012
Chris Burti, Vice President and Senior Legal Counsel

North Carolina Supreme Court

Reformation of a Deed

Willis v Willis, (10-1338), September 20, 2011

Gift of real property to son had unintended consequences in that it did not go to the grantee's brother at the grantee's death and instead went to the grantee's children. The mother of the two brothers was the grantor and sought reformation.

Ordinarily, fraud or some inequitable conduct must be shown to support reformation of a deed based upon a unilateral mistake. However, The Court of Appeals in the divided opinion of Willis v Willis , (10-1338), September 20, 2011, relying upon language in Nelson v. Harris , 32 N.C. App. 375, disc. rev. denied, 292 N.C. 641, (1977), ruled that when a gift is made, all that must be shown is that the deed failed to express the actual intent of the donor. However, the Court also ruled that there was not a scintilla of evidence of an actual mistake, reformation was not available stating: "a party's 'mistake[] as to the legal consequences of the deed ... will not support reformation.' Mims v. Mims, 48 N.C. App. 216, 218, 268 S.E.2d 544, 546 (1980)".

The North Carolina Supreme Court stated that "the quoted statement from Nelson is nonbinding dictum and is actually contrary to North Carolina law." Nelson resulted from a party seeking reformation of a deed based on mutual mistake of the parties and the court stated that the dictum was "unsupported by precedent" and would be "of quite limited value even if it did not conflict with previous decisions of this Court." The Court noted that it had previously described the possible grounds for reformation of a deed in the case of Crawford v. Willoughby , 192 N.C. 269, 134 S.E. 494 (1926). "(1) mutual mistake of the parties; (2) mistake of one party induced by fraud of the other; and (3) mistake of the draftsman." In Crawford, the Supreme Court explained that "mistake of one party to the deed, or instrument, alone, not induced by the fraud of the other, affords no ground for relief by reformation." In this opinion the Supreme Court notes that "Crawford related to a mistake by the draftsman, and reform was allowed on that basis, id. at 271, 134 S.E. at 495, the three bases for reformation identified by that opinion have been cited and reaffirmed in this state many times in various situations since 1926. E.g., Mason v. Brevoort, 254 N.C. 619, 622, 119 S.E.2d 453, 455 (1961) (citing Crawford to affirm nonsuit in a reform action when there was no evidence of mutual mistake, unilateral mistake induced by fraud, or a mistake of the draftsman); Smith v. Smith, 249 N.C. 669, 674, 107 S.E.2d 530, 533-34 (1959) (remaining citations omitted). There being no record of evidence of mutual mistake, of unilateral mistake induced by fraud, or of a mistake of the draftsman, the matter was resolved as matter of law without further discussion of evidentiary findings by affirming and modifying the Court of Appeals.

Clerk of Superior Court - No Authority to Limit Attorney's Fees in Foreclosure

In re Foreclosure of Vogler Realty, Inc., (11A11), January 27, 2012
The authority of the Clerk of Superior Court to determine the reasonableness of attorney's fees that trustee-attorney in foreclosure proceeding pays to himself in addition to trustee's commission was at issue. The Attorney/Trustee charged a trustee's commission of $16,813.12 (5% of the highest upset bid) and a trustee's attorney's fee of $33,573.82 (15% of the outstanding balance on the promissory note). There was a surplus that the fees substantially affected resulting in this litigation. The majority ruled that the foreclosure statute does not expressly authorize the clerk to review the distribution of attorney's fees for reasonableness and prior opinions of the Court have consistently emphasized that the Clerk of Superior Court has limited jurisdictional authority, having only such authority as is given by statute.

The Supreme Court then goes on to opine that junior lien holders do not haves standing to complain in such matters. The majority makes absolutely no recognition of its own substantial body of law concerning the status of a trustee of a deed of trust being the legal titleholder and totally ignores its own recognition of the U.S. Supreme Court opinion of Mennonite Bd. of Missions v. Adams, 462 U.S. 791 (1983) which held that junior lien holders have due process rights. The statutes and cases that the opinion cites in support of this view clearly run afoul of the both the doctrine and governing law on the subject.

The dissenting opinions are better reasoned, but also off the mark with respect to the controlling law.

North Carolina Court of Appeals

Executor's Power of Sale

Collier v Bryant, (10-1579), November 1, 2011

Where the testator's Will first directs the Personal Representative to sell property and then provides that the devisees may take in fee if they can unanimously agree, there is not a devise to the heirs And the pr has the power to sell although the deed is voidable if in derogation of the Personal Representative's fiduciary duty.

Foreclosure - Merger as Evidence Petitioner is Holder

In re Carver Pond I, (11-367), December 6, 2011

Here, evidence of the note holder status of the petitioner was challenged. The record on appeal contains three documents which evidence the merger between the final assignee, as reflected by the record, LaSalle Bank National Association ("LaSalle") and Bank of America. An Affidavit of Noteholder executed by the servicer, a certified statement from the assistant secretary of Bank of America and a letter from the Comptroller of the Currency Administrator of National Banks officially certifying that LaSalle merged with Bank of America and authorizing Bank of America "to operate the former main and branch offices of LaSalle" as "branches of Bank of America[.]"

The Court concluded that the three documents were sufficient evidence of the merger between LaSalle and Bank of America. The respondent did not dispute the fact of the merger, merely the evidence of it and the effect as to whether the Loan Documents were transferred from LaSalle to Bank of America. Citing Econo-Travel Motor Hotel Corp. v. Taylor, 301 N.C. 200, (1980), the Court of Appeals held that "Bank of America, as the surviving corporation after the merger, succeeded by operation of law to LaSalle's status as owner and holder of the Loan Documents. The Econo-Travel Court is quoted: "if the alleged merger had occurred, then plaintiff, as the surviving corporation, would have succeeded by operation of law to Econo-Travel Corporation's status as owner and holder of the promissory note". This panel thus determined that the evidence of the merger between LaSalle and Bank of America was competent evidence that Bank of America is the holder of the Loan Documents.

Foreclosure - Sufficiency of Evidence of Holder Status

In Re Foreclosure of Yopp, (11-753), December 20, 2011

This opinion was the mirror image of the outcome of In re Adams, __ N.C. App. __, 693 S.E.2d

705 (2010) with this panel of the Court of Appeals determining that the non-challenged evidence was sufficient to support the trial court's foreclosure order. Here, merger evidence was again challenged and internet printouts of merger were ruled inadmissible, however an unchallenged document also stated the merger history and the court found that sufficient.

Summary Judgment Determining Property Line Boundary Proper

Williamson v Long Leaf Pine, LLC, (11-634) January 17, 2012

The questioned boundary line was established in 1955 and was tied to a physical monument. The same line was used by the North Carolina General Assembly to establish the boundary of the Town of Sunset Beach in 1963. The line was resurveyed at least six times subsequently between 1964 and 2000 and its location was confirmed each time by being tied to the same monument. The respondent acquired the adjoining property by deed referencing one of these surveys and acquired property within the petitioner's deeded property description by non-warranty deed. The sole reported evidence presented by the respondent was an affidavit by a surveyor who had not surveyed the property stating an opinion that the prior surveys were all in error. The trial court's Summary Judgment order for the petitioners was upheld in that the respondent was affirmed because: "'When a motion for summary judgment is made and supported as provided in this rule, an adverse party may not rest upon the mere allegations or denials of his pleading, but his response, by affidavits or as otherwise provided in this rule, must set forth specific facts showing that there is a genuine issue for trial.' N.C. Gen.Stat. § 1A-1, Rule 56(e) (2011). '[A]n issue is genuine if it is supported by substantial evidence, which is that amount of relevant evidence necessary to persuade a reasonable mind to accept a conclusion.' Liberty Mut. Ins. Co. v. Pennington , 356 N.C. 571, 579, 573 S.E.2d 118, 124 (2002) (quotations and citations omitted). It means 'more than a scintilla or a permissible inference." DeWitt v. Eveready Battery Co., 355 N.C. 672, 681, 565 S.E.2d 140, 146 (2002) quotations and citation omitted)."

Foreclosure Sale 10% below FMV - No Defense to Deficiency Action

Blue Ridge Sav. Bank, Inc. v Mitchell , (11-289) February 7, 2012

The admissible evidence in this case suggested that the lender's bid at the foreclosure sale might have been approximately 10 percent below FMV. The Court of Appeals notes that North Carolina appellate courts have not set out particular guidelines as to what "substantially less" than the property's true value means entitling an owner to the deficiency defense set out in N.C.G.S. Section 45-21.36. However, First Citizens Bank & Trust Co. v. Cannon , 138 N.C. App. 153, (2000) affirmed a judgment that a bid that was twenty percent less than the appraised value of the property was "substantially less" than the property's true value and that the debtors in that case were entitled to the defense.

The Court of Appeals stated that although "the twenty percent mark is not a bright line rule or cut-off by any interpretation, defendants offer no authority (including any reference to Cannon) supporting their assertion that the bid was substantially less than the true value or fair market value of the property; indeed, the argument is based merely on the fact that both the appraised value and the subsequent sale price were more than the bid." As the statutory requirement is that the "bid be "substantially less" than true value, not just "less" than true value, and because defendants have offered no authority or cogent argument supporting their claim that plaintiff's bid was substantially less than the property's true value, we affirm the order of the trial court."

Assessments of Pre PCA Homeowners Association Enforceable Under the Act

In re Five Oaks Recreational Ass'n, Inc., (11-1053) March 6, 2012

"We note the Act generally applies only to homeowners associations created on or after 1 January 1999, see id., and, according to the Declaration, Petitioner was created on or about 9 December 1975. However, some of the Act's provisions-and the only provisions relevant to the matter sub judice-apply regardless of the association's date of inception."

No Judicial Notice as to Holder of Note by Merger on Summary Judgment

TD Bank, N.A. v Mirabella, (11-1178), March 20, 2012

Note holder was alleged to be owner of note as the result of a merger. The Court of Appeals ruled that the bank was not so well known as to provide judicial notice, nor were copies of South Carolina Secretary of State online records sufficient for judicial notice. Summary Judgment was not proper and the case was remanded for proper proof and findings.

Out of State Service of Process

Beatty v Greenfield, (11-1086), March 20, 2012

This was a paternity case, but the opinion is important in title litigation. When the title to real property results from a judicial decree, the title examiner will be required to review the court file in order to determine whether the proceeding was proper. Adequate service on all necessary parties is absolutely necessary to establish one of the jurisdictional elements required for the decree to be effective. Rule 4(a) of the NCRCP states that when service is made outside of North Carolina, the process server must be (1) "anyone who is not a party and is not less than 21 years of age" or (2) "anyone duly authorized to serve summons by the law of the place where service is to be made." N.C.G.S. Section 1-75.10(a)(1)(b) that when a defendant is personally served out of state, proof of service may be established by an affidavit executed by the process server. That affidavit must show the process server's "qualifications to make service under Rule 4(a) or Rule 4(j3) of the Rules of Civil Procedure." And these qualifications may be established according to the proof of service rules of the jurisdiction where service was made. It may be necessary to review those rules if service is by someone other than a state official of that jurisdiction. Fortunately, this information is now readily available on line.

Reformation of Deed of Trust Not Permitted Against BFP

Branch Banking & Trust Co. v Teague , (11-787), March 20, 2012

The lender plaintiff refinanced existing mortgage loans and the deed of trust only secured a small vacant portion of the two tracts composing the debtor's residence property. The debtors deeded both tracts to the defendant judgment creditors subject to the deed of trust in exchange for a reduction in the judgment debt. The lender sought reformation and an equitable lien superior to the interest of the defendant creditors. The reduction in the amount of the judgment "constituted the provision of valuable consideration in return for the underlying transfer, since a grantor who cancels or reduces a grantee's preexisting debt in exchange for a deed is a bona fide purchaser for value. See Sansom v. Warren, 215 N.C. 432, 436, 2 S.E.2d 459, 461 (1939)." In a divided opinion the Court of Appeals affirmed that "reformation of a deed of trust based upon a mutual mistake or the imposition of an equitable lien or parol trust will not be allowed to prejudice the rights of a bona fide purchaser for value..." However, the Court remanded directing the trial court to determine "whether Defendants would be prejudiced by reformation of the deed" as a genuine issue of precluding summary judgment on the issue. The majority opined that if the defendants accounted for the mortgage balance in determining the value assigned to the reduction in the judgment debt, there might be no 'prejudice'. Implicit in the remand is that reformation would be allowed to relate back if found appropriate and if not prejudicial to the defendants. The dissenting opinion disagreed with the remand and considered any reformation prejudicial to the interest. "This argument, which the Court obviously accepts, does not rest upon a comparison between the nature and extent of Defendants' legal rights with or without reformation of the deed of trust. Instead, the Court appears to compare the economic effect of reformation with Defendants' subjective expectations regarding the economic value of the bargain they made with the [Defendant Owners]. Put another way, the Court, consistently with Plaintiff's argument, assumes that, if the amount of the debt owed by the [Defendant Owners] to [Plaintiff] was utilized in calculating the amount of credit which the [Defendant Owners] were entitled to receive against the [Defendant Creditors] judgment in return for deeding the entire parcel to the [Defendant Creditors], then the [Defendant Creditors] would be unable to show the necessary prejudice.

Foreclosure; No Jurisdiction to Order Arbitration, Appeal Moot Without Bond

In re Foreclosure of Cornblum, (11-534) April 17, 2012

The Superior Court ordered arbitration in foreclosure proceeding on appeal from the Clerk of Superior Court. The narrow scope of the statutory foreclosure by power of sale hearing imposes a jurisdictional restriction on the Clerk of Superior Court and the Superior Court on appeal to making the findings contained in N.C.G.S. Section 45-21.16(d). The Clerk's decision may be appealed to the Superior Court for a de novo hearing and per N.C.G.S. Section 1-292, an appeal from the Superior Court does not stay the court's order unless the appellant posts an appeal bond. See In re Hackley, COA 10-757, ___ N.C. App. __, disc. review denied and review denied as moot , __ N.C. __, (2011).

Landowner Not Liable for Dangerous Condition on Adjacent Property

Lampkin v Hous. Mgmt. Res., Inc., (11-1062), May 15, 2012

A four-year old child was playing on an apartment complex common area playground when she passed through a broken portion of a chain-link fence owned by the apartment complex to play on a frozen pond on adjacent property. The ice broke; the child fell into the water and sustained permanent brain injury. It was also alleged that the owner of the adjacent property previously notified the complex that "children were coming through the fence onto her property" and that she "was concerned someone would get hurt," that an apartment complex employee told her that "they would look into the matter."

The Court with appropriate citation stated: "In our view, the foregoing authority clearly establishes that a landowner's duty to keep property safe (1) does not extend to guarding against injuries caused by dangerous conditions located off of the landowner's property, and (2) coincides exactly with the extent of the landowner's control of his property. As such, because Defendants did not control the pond on the adjacent property, their duty to keep their premises safe did not include an obligation to make the pond safe by preventing children on their land from accessing the pond. Rather, the adjacent landowner, with exclusive control over the pond, had the sole duty to keep the pond safe, the only obligation to act, and the only possible liability."

Chapter 44A Liens - Implied Amendment of Pleadings; Agency; Interest

Young & McQueen Grading Co. v Mar-Comm & Assocs ., COA (11-1450), June 5, 2012

This was a lien enforcement case and the lender attempted to eliminate or minimize the claims of the contractor. There were variations between the pleadings, the contract and the claim documents arising from the fact that the LLC owned by the corporate owner of the property dealt with the contractor. As no objection was raised at trial the pleadings were deemed implicitly amended. The LLC was also deemed to be the agent for the owner and as the acts of an agent are the acts of the principal, the agent's act of contracting with the plaintiff was the owner's act and the claim of lien properly lists the owner as such.

The lender also contended that interest was improperly included in the judgment because "there is no contract of any kind between [the contractors] and [the lender Defendants]." The Court of Appeals stated that this argument was sophistic because Paving Equip. of the Carolinas, Inc. v. Waters , 122 N.C. App. 502, (1996) opined that while a judgment enforcing a lien may "generally be entered only for the principal amount shown to be due, '[i]f [] there is an agreement between the parties with regard to interest, that interest due pursuant to the agreement will be included as part of the principal.'" The Court by reference to the Chapter 44A ruled stated the requirement of an agreement for interest between the parties clearly refers to the agreement between the lien claimant and the owner of the property.

Enforcement Denied for Alleged Violation of Restrictive Covenants

Sanford v Williams, COA (11-1066) June 5, 2012

Restrictive covenants included a provision stating:

4. All lots in said subdivision as shown on said plat shall be used for residential purposes. No buildings shall be erected, altered, placed or permitted to remain on any lot other than one detached single family dwelling not to exceed two and one-half stories in height and a private garage which may have as a part of said garage, a storage room.

Defendant built a carport and built it within the side minimum setback. The plaintiff contended that the carport is not a "garage" as described in paragraph 4 and is prohibited by the restrictive covenants unless it is part of the "single family dwelling[.]" The defendants contended that the carport is a "garage", or that it is a permitted auxiliary structure and the Court of Appeals agreed.

"In interpreting ambiguous terms in restrictive covenants, the intentions of the parties at the time the covenants were executed ordinarily control, and evidence of the situation of the parties and the circumstances surrounding the transaction is admissible to determine intent." Angel v. Truitt, 108 N.C. App. 679, 681, 424 S.E.2d 660, 662 (1993) (citation and quotation marks omitted)."

The Court observed that the restrictive covenants did not define the terms "carport" or "garage"; however, both terms are listed as types of auxiliary structures to the single family Residence in Paragraph 8 which provides as follows:

8. That no single-family residence having less than 1,400 square feet of heated floor space exclusive of garage, carport, basement, or other auxiliary structure shall be erected on the lot. Any residence having living quarters of more than one floor must contain at least 1,000 square feet of heated floor space on the principal floor and a total of not less than 1,800 square feet of heated floor space exclusive of garage, carport, basement, or other auxiliary structure.

The Court went on to support the interpretation of the covenant with an extensive dictionary analysis of the term. Thought it would seem that the Paragraph 8 creates its own definition without ambiguity. The plaintiff also contended that the carport violates the restriction tin Paragraph 9 that all homes constructed shall be at least "ten (10) feet from either side property line. The defendants contended that the term "home" in Paragraph 9 refers only to the "dwelling place" and does not include the carport and again, the Court of Appeals agreed with them.

"The restrictive covenants do not specifically define 'home'; however, several paragraphs treat a 'single family dwelling' or 'residence' separately from a 'garage' or 'carport[.]' Paragraph 4 states that the only buildings permitted on a subdivision lot are "one detached single family dwelling" and 'a private garage[.]'"

Rule against perpetuities; the Connor Act

New Bar P'ship v Martin, (12-64), June 19, 2012

Charlie Goodnight's, Inc. ("CGI") leased the property in dispute from Martin in 1988 pursuant to a written lease agreement with a term that ran from December 1988 through December 1993 and it included an option to renew for three additional five-year terms. The lease also provided CGI an option to purchase during the term of the lease and a right of first refusal during any subsequent five-year renewal term. In 1989 the parties agreed to an amendment providing for the execution of a memorandum of the lease for the purpose of recording; however none of these or any subsequent lease documents were recorded. CGI subsequently assigned the lease to New Bar with lessor's approval.

In 1999 the parties executed an amendment extending the renewal rights for two additional 5-year terms until December 2018. In 2002 the parties executed a third amendment to the initial lease, purporting to extend the right to renew by another two five-year terms, to run through 14 December 2028. In 2004 the lessor transferred the property to an inter vivos trust with his son as the trustee without consideration. An LLC was formed with the son as manager and the property was transferred to the LLC for $10 in consideration. The LLC contracted with a third party for a sale of the property and a memorandum, of contract was recorded.

The lessee sued for declaratory relief which complaint was dismissed on several grounds two are of particular significance to property practitioners. The Court of Appeals cites Smith v. Mitchell , 301 N.C. 58, (1980) as establishing the rule that "preemptive provisions which are unreasonable are void as imposing impermissible restraints on alienation[,]" and "The general rule is that as long as the price provision in a preemptive right provides that the price shall be determined either by the marketplace or by the seller's desire to sell, a preemptive right is reasonable if its duration does not violate the rule against perpetuities." The Court of Appeals noted that the "Court resolved that 'the better rule is to limit the duration of the right to a period within the rule against perpetuities and thus avoid lengthy litigation over what is or is not a reasonable time within the facts of any given case.'"

The Court of Appeals further ruled the provisions of N.C.G.S. Section 41-18 did not apply to non donative transfers such as this lease. Nor did the statute's exclusions apply to commercial leases and further that as the statute did not apply, the common law rule was not abolished by the adoption of the statute to the extent the statute did not apply to such transfers and that the common law is still in effect. The Court's analysis is a bit circuitous, but likely correct in this context.

The Court also ruled that the protections of the recording act s were afforded the vendee. While the transfers to the trust and to the LLC may not have been protected by the Connor Act, there was no forecast of evidence in the facts as reported to suggest that the vendee participated in wrongful acts that would give rise to findings of fraud or estoppel. On that narrow point the case appears to have been properly decided.

Executors - No Standing to Appeal Trial Court Asset Distribution Order

Bigger v. Arnold, COA (11-1604) July 17, 2012

Question arose as to the pre death distribution of the bulk of the decedent's assets into a joint and survivor account with surviving spouse which essentially excluded the charitable trust beneficiary. Executor sought guidance from the court as to the validity of the transfer, the charitable beneficiary did not contest and the court ruled in favor of the spouse. As the Personal Representative has no interest in the outcome of a controversy regarding the distribution of the assets. "Where there is a controversy between legatees under a will, in which controversy the executor, as such, has no interest, such executor is not a party aggrieved by a decree of distribution and may not appeal therefrom." Dickey v. Herbin, 250 N.C. 321, 326, 108 S.E.2d 632, 636 (1959); see also Ferrell v. Basnight, 257 N.C. 643, 645, 127 S.E.2d 219, 221 (1962) (ruling that an executor cannot appeal from a decision affecting the rights of the beneficiaries).

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