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Issue  219  Article  356
Published:  1/1/2015

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COA Holds Revenue Suspended Corporation Can Wind Up
Chris Burti, Vice President and Senior Legal Counsel

LE Oceanfront, Inc., et al v Lands End of Emerald Isle Association, Inc.COA14-287, Filed on December 31, 2014, is a significant appellate decision from a unanimous panel of the North Carolina Court of Appeals that presents a modern treatment and recognition of the old doctrine recognizing de facto corporations and which resolves the question of whether a corporation subject to a revenue suspension may wind up without reinstatement after dissolution.

The individual plaintiffs are owners of beachfront lots in a residential subdivision (the "Subdivision") in Emerald Isle, North Carolina. The corporate plaintiff was formed by the individual plaintiffs and the defendant is the homeowners association ("the HOA") which owns all of the Subdivision's common areas. The Subdivision was developed by a series of developers over two decades. The property which makes up the Subdivision proper and the Strip, or portions thereof, were transferred on a number of occasions between different developer entities during this time and this fact does not affect the outcome of the case, therefor the Court used the term "Developer" to refer to any or all of the developers of the property as we also will.

The strip of land at issue in this case consists of a 14 plus acre tract of land between lots in the Subdivision as platted and the high water mark of the Atlantic Ocean (the "Strip.") The HOA claimed that the Strip is actually part of the Subdivision's common area, which it acquired by deeds from the Subdivision's developers ("the Developers") in 1988 ("the 1988 deeds") conveying the open spaces and common areas shown on the recorded maps to the HOA or, alternatively, that it had an easement to use the Strip. The corporate and individual plaintiffs in this action appealed from the trial court's summary judgment order in favor of the HOA ruling that the HOA was the fee simple owner of the Strip. The plaintiffs contend that the 1988 deeds did not include the Oceanfront Strip and that the plaintiff corporation became the owner of the Strip through three quitclaim deeds from the Developer delivered in 2011 and 2013 ("the quitclaim deeds").

By 1973, the Developer acquired the tracts of land comprising the Subdivision and the Strip. The Subdivision was developed in sections and the Developer recorded several maps ("the 1974 maps") for different sections depicting lots, streets, common areas, open spaces, and other features within each section in the development process as well as a Declaration of Covenants and Easements ("the 1974 Declaration") referencing these maps. The Developer subsequently filed four corrective maps in the 1980's, ("the 1980's correction maps"), two of which correct the two 1974 section maps depicting the Subdivision adjacent to the Strip. The individual plaintiffs purchased two of the beachfront lots in 2004 believing them to extend all the way to the mean high water line of the Atlantic Ocean and subsequently installing sand fences; planting sea oats; building decks, walkways and gazebos; paying beach nourishment assessments to the Town of Emerald Isle as oceanfront owners; and giving the Town easements for beach nourishment projects.

The HOA sent letters to all beachfront lot owners claiming ownership of the Strip in 2005 as the result of questions concerning those homeowners' installation of structures in the Strip. To support its contentions, the HOA presented evidence that it had been pumping excess storm water into the Strip from time—to—time since the 1990's and the individual Plaintiffs contended that they had observed that the HOA had pumped excess storm water in front of their residence in 2010. The individual Plaintiffs formed the corporate Plaintiff in 2011 and secured quit claim deeds from Developer quitclaiming whatever interest these Developer entities had in the Strip.

The Court of Appeals set out the procedural history of the case succinctly as follows:

In 2011, Plaintiffs filed suit against the HOA, raising claims (1) to quiet title (based on the quitclaim deeds) ; (2) for slander of title (claiming ownership) ; (3) for equitable estoppel (based on alleged conduct by the HOA when selling the beachfront lots in acting in a manner to lead purchasers to believe that those lots extended all the way to the ocean's mean high water mark) ; (4) for nuisance (based on the storm water pumped into the Oceanfront Strip) ; and (5) for trespass; and requesting inter alia ‘[t]he Court declare that [the corporate Plaintiff] is the owner of the Oceanfront Strip[.]" The HOA filed its answer including counterclaims for declaratory judgment that it was the owner of the Oceanfront Strip, a claim to quiet title, and, in the alternative, for an easement over the Oceanfront Strip.

In 2013, the HOA filed a motion for summary judgment on all claims and counterclaims. After a hearing on the motion, the trial court granted the HOA's motion for summary judgment. The judgment declared that the Developer deeded the Oceanfront Strip to the HOA in fee simple in 1988 and that the Oceanfront Strip is part of the "common area" of the Subdivision; and dismissed all other claims and counterclaims with prejudice, except Plaintiffs' claims for nuisance based on the storm water pooling in front of their residences. Plaintiffs took a voluntary dismissal of their nuisance claims and, subsequently, filed their notice of appeal from the trial court's judgment.

With regard to the easement claims of the HOA, the Court of Appeals determined that there were unresolved questions of fact and remanded the issue to the trial court for hearing. The Court of Appeals in addressing the HOA's claims that it acquired fee simple title in the Strip through the 1988 deeds notes that those deeds do not explicitly reference the Strip and do not include a metes and bounds description. Instead, they convey the "streets and other common areas" to the HOA describing them by reference to the 1974 Declaration as amended and the two 1980's correction maps. The Court of Appeals analyzed the 1988 Deeds to the HOA, the 1974 Declaration, the 1974 Maps and the 1980's correction maps. The Declaration references the maps for descriptive purposes, therefore the Court's analysis focuses on what they depict. The opinion states that there is nothing in any of the 1974 maps to indicate that the Strip were to be considered part of any section of the Subdivision and the court further concluded that these maps show a contrary intent. With respect to the relevant 1980's correction maps, the opinion reveals the Court was convinced that they were "unambiguous in demonstrating an intent by the Developer not to include" the Strip as part of the area affected by the maps. The opinion recites that the 1980's correction maps show "various portions" of Strip, however, "much of this strip is covered by the survey's seal and notary signature." Further, these maps did not disclose the complete boundaries revealing to the court, additional evidence "that the Developer did not intend to include the Oceanfront Strip in the conveyance." Thus the court disposed of the claims of title by the HOA in the Strip by virtue of the 1988 deeds. There is a valuable lesson for real property practitioners to be had in this case. Known claims of property rights based upon matters "suggested" on plat cannot be simply ignored even when clearly insufficient under the law. This case amply demonstrates that parties may be willing to contest these issues at great expense right on up to the appellate level.

In this litigation, the HOA also contended that the Developer's 2011 quitclaim deed to the corporate Plaintiff was invalid because, the corporate Plaintiff had not been properly formed as a legal entity at the time the deed was filed and because the Developer allegedly lacked capacity to act as a corporation because it had been dissolved as the result of a revenue suspension and had not been reinstated.

The corporate Plaintiff's articles of incorporation were filed with the Secretary of State forty-nine minutes after the quitclaim deed was recorded. The HQA contended that the corporate Plaintiff as grantee was not a "legal person" as is necessary in order to be a grantee capable of taking title as required for a valid conveyance. The plaintiffs contended that the transaction occurred on the same day the corporate Plaintiff was formed, that it should be considered a ‘de fact' corporation and that the deed was therefore valid. The Court's opinion notes with particularity that the record evidence in the case disclosed that the Plaintiffs' counsel sent the articles of incorporation to the Secretary of State's Office by courier hours prior to the recordation of the deed in the Register of Deed. Significantly, the opinion notes that in North Carolina where "there has been a bona fide effort to comply with the law to effectuate an incorporation, and the persons affected thereby have acquiesced therein, and have exercised the functions pertaining to the corporation, it becomes a de facto corporation, whose corporate existence cannot be litigated in actions between private individuals nor between private individuals and the assumed corporation. And, again, if a corporation de facto exists, it may exercise the powers assumed, and the question of its having a right to exercise them will be deemed one that can be raised only by the State... citing "Wood v. Staton, 174 N.C. 24[6], 253, 93 S.E. 790, 794 (1917)". However the companion case Pocahontas Fuel Co v. Factory, 93 S.E. 790 (N.C., 1917) actually bears the text of the North Carolina Supreme Court opinion and bears citing. The Court of Appeals found that the quit claim deed was valid because "a bona fide effort was made to comply with the law to incorporate and that ‘the persons affected' - which would include the Developer and the corporate Plaintiff - acquiesced in the action." It should be noted that for title examination purposes, it might well be considered prudent to treat such situation like adverse passion, questionable until determined by a court of competent jurisdiction.

Unless overturned on further appeal, this case is also significant in that it resolves a long standing question with respect to the winding up powers of a dissolved corporation subject to a revenue suspension that hasn't been reinstated by the North Carolina Secretary of State pursuant to N.C.G.S. Section 105-232. Such a corporation's power to act is explicitly limited under North Carolina N.C.G.S. Section 105-230. The HOA contended that the Developer could not convey property because it was under revenue suspension by the Secretary of State in 2011, pursuant to N.C. Gen. Stat. § 105- 230(b), administratively dissolved and that it had not been reinstated pursuant to N.C. Gen. Stat. § 105-232. This has been a widely accepted contention prior to this decision. The plaintiff's contended, as do some legal pundits, that N.C.G.S. Section 105-232 does not limit the Developer's conveyance of the Strip as an act of winding up its corporate affairs pursuant to N.C.G.S. Section 55-14-05.

N.C.G.S. Section 105-230(b) provides: Any act performed or attempted to be performed during the period of suspension is invalid and of no effect, unless the Secretary of State reinstates the corporation or limited liability company pursuant to G.S. 105-232. However, N.C.G.S. Sections 55-4-05(a)(2) and 55-4-05 (a)(5) provide:
(a) A dissolved corporation continues its corporate existence but may not carry on any business except that appropriate to wind up and liquidate its business and affairs, including:
(2) Disposing of its properties that will not be distributed in kind to its shareholders;
(5) Doing every other act necessary to wind up and liquidate its business and affairs.

The Court of Appeals concludes the the latter provisions override the Chapter 105 provision and "even if the Developer was under revenue suspension, it could still transfer its property if done so pursuant to winding up its affairs."

The opinion explains: "Although acquisition of new property is not an incident to winding up, see Piedmont & Western Inv. Corp., 96 N.C. App. at 108, 384 S.E.2d at 689, we hold that the disposition of property in this case is precisely what N.C. Gen. Stat. § 55-14-05(a) (2) or (5) was enacted to allow. We note that Ronald Watson, who signed all the 2011 quitclaim deed on behalf of the Developer entities, stated that it was his intention to transfer the entire Oceanfront Strip to the corporate Plaintiff as part of winding up the entities. Further, there is no indication that any of the Developer entities were still engaging in any development activities or had any intent to do so in the future." While it has long been clear that a dissolved corporation continues to exist until its affairs have lawfully been consummated, this decision seems to be an authorization for winding up deeds in situations where the public record is very clear that defunct corporation is no longer carrying on business and the deed is reasonably furthering the winding up process. The opinion was unanimous and as of this writing, it is unknown whether a discretionary appeal will be allowed.

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