The Statewide Title Newsletter and Legal Memorandum

View Current Newsletter - Search The Archive 
Sign UpPrint

Issue  282  Article  436
Published:  7/1/2022

View the Entire Newsletter

The Cherry Community Org. v Sellars, (141PA20-1) 5/6/2022
NC's Uniform Voidable Transactions Act Defense Construed

Chris Burti, Vice President and Senior Legal

In this matter the trial court dismissed the plaintiff Community Association's action seeking recovery of land under the North Carolina Uniform Voidable Transactions Act (UVTA). In a unanimous and unpublished opinion, the North Carolina Court of Appeals affirmed the trial court and the North Carolina Supreme Court, in an unusual step, allowed the plaintiff's petition for discretionary review.

The trial court concluded, and the Court of Appeals agreed, that the defendants in the transaction sub justice were good faith purchasers for value having a legitimate defense to the plaintiff's claims under the UVTA. However, the Supreme Court opined that the trial court's findings of fact, standing unchallenged, require the trial court to ignore the protection of the good faith purchaser defense for the defendants by applying common law agency principles. As discussed latter this opinion will likely present challenges for title examiners and title insurance underwriters.

The plaintiff is a North Carolina nonprofit dedicated to the preservation and enhancement of a historic Black, working-class neighborhood area of Charlotte known as Cherry, near the city's uptown district. The opinion's recitation of the underlying facts at issue is reasonably concise and helpful to understanding the decision.

The opinion is footnoted as follows:

In addressing this case in a manner to promote clarity, the term "defendants" collectively refers to the two MAP entities which are named parties in this action as well as their respective principals who are identical, yet unnamed in the underlying lawsuit.

The essential facts giving rise to the action as stated by the Court are:

Plaintiff organization is comprised of occupants of properties within the Cherry community and leases affordable housing units which plaintiff owns to low-income, disabled, and senior residents, some of whom have lived there for generations. In furtherance of this mission, plaintiff began contracting with an individual named Stoney Sellars and his real estate development company StoneHunt, LLC in 2004 in order to develop affordable housing units on several acres of land which plaintiff owned in the Cherry neighborhood. Under the ensuing contracts, StoneHunt obtained title to eight acres of prime real estate owned by plaintiff near the center of Charlotte at below-market rates in exchange for a promise that StoneHunt would develop certain parcels of the land into housing units for low-income, disabled, and senior occupants. However, StoneHunt failed to build all of the affordable housing units which it pledged, instead maneuvering to sell most of the land conveyed to StoneHunt by plaintiff under the contract to market-rate residential builders in May 2014 for an enormous profit. Of the land conveyed to StoneHunt by plaintiff under the original contract, StoneHunt retained only a half-acre parcel. Adjacent to this half-acre parcel was another quarter-acre parcel which StoneHunt also owned but that was otherwise unrelated to StoneHunt's unfulfilled contractual obligations to plaintiff. Together, these two parcels are identified in this matter as the "subject property."

Defendants Midtown Area Partners Holdings, LLC and Midtown Area Partners II, LLC (MAP) are real estate development businesses which share identical ownership. Defendants' principals are sophisticated, informed real property and financial investment professionals who have heightened knowledge about the marketplace and land values.

One of defendants' principals approached Sellars twice during the 2012-2013 time period in order to probe StoneHunt's willingness to sell the subject property to MAP. Defendants' representative explained that MAP owned adjacent parcels to the subject property and remarked that it did not appear that StoneHunt was in the process of developing the land at issue despite a sign from 2008 which was situated on the property stating, "Town Homes Coming." Sellars denied the occurrence of such overtures. Defendants' agent then proposed that StoneHunt and MAP work together in developing the subject property which StoneHunt controlled and the adjacent parcels that defendants owned. The two entities, through their respective actors, entered into an operating agreement to develop these contiguous properties into a $50 million mixed-use project in March 2014. Extending from the creation of this arrangement until its termination, defendants and StoneHunt were the principals of a general partnership engaged in a joint venture for the development of the mixed-use project, with defendants enjoying an insider status to StoneHunt's dealings with the subject property.

The next five pages of the opinion's statements of facts can be fairly summarized by this statement by the Court: "StoneHunt and defendants agreed to fully conceal their pending land transaction until it was too late for plaintiff to attempt to prevent the sale..." It may be surmised that these facts may have been the driving force behind the Court's conclusions. The Court notes:

In its judgment, the trial court included extensive, expansive findings of fact and conclusions of law which detailed a calculated scheme by Sellars and StoneHunt to fraudulently liquidate the subject property and to hide the monetary proceeds from legitimate creditors. Despite its express recognition of the width and depth of StoneHunt's fraud, the trial court nonetheless concluded that defendants "acted in a commercially reasonable manner" in their acquisition of the property and "did not engage in fraudulent activities." The trial court further concluded that defendants had "established and met its burden of proof to show that it was a good faith purchaser of the Subject Property," and lamented that its decision and its designation of defendants as good faith purchasers would likely leave plaintiff with little recourse in collecting the $7 million owed by StoneHunt to plaintiff for StoneHunt's breach of their 2004 contract. The trial court dismissed plaintiff's second lawsuit with prejudice and declared that the Notice of Lis Pendens was ineffectual.

The Court concluded that the defendants "were imputed with the knowledge of their co-principal's fraudulent intent by virtue of the principal-agent relationship which existed between the parties pursuant to common law. Therefore, the Court of Appeals erred in affirming the trial court's determination that defendants were good faith purchasers of the subject property." It considered the thirteen factors delineated in N.C.G.S. § 39-23.4(b) and found six to apply.

1. Subsection (b)(1): The transfer or obligation was to an insider.
Collectively, defendants, as the grantee of the subject property, were insiders of StoneHunt when the transfer of title was made to defendants.

2. Subsection (b)(3): The transfer or obligation was disclosed or concealed.
StoneHunt concealed its sale of the subject property to defendants. StoneHunt did not disclose to plaintiff the sale of the subject property until after defendants took title to the land. The concealment was instituted by StoneHunt at a time when plaintiff's claims against StoneHunt in the first lawsuit were reinstated by the Court of Appeals. StoneHunt's eventual disclosure to plaintiff of the transfer was performed in order for StoneHunt to gain an advantage in the reactivated litigation.

3. Subsection (b)(4): Before the transfer was made or obligation was incurred, the debtor had been sued or threatened with suit.
Plaintiff filed the first lawsuit against StoneHunt on 10 September 2015. The transfer of title to the subject property was made by StoneHunt to defendants on 2 February 2017. Plaintiff's appeal of the dismissal of the first lawsuit was pending at the time of the negotiation, and the Court of Appeals opinion which reversed the dismissal of plaintiff's lawsuit against StoneHunt and reinstated the action was issued on 30 December 2016, more than a month prior to the transaction's consummation.

4. Subsection (b)(5): The transfer was of substantially all the debtor's assets.
The subject property which StoneHunt transferred to defendants was the real estate development company's sole remaining real estate asset at the time, and StoneHunt only had a small amount of cash on hand. With the exception of the cash and the $900,000 promissory note which defendants issued to StoneHunt which became due one year from its creation, StoneHunt had a weak financial condition and no remaining assets. The subject property was StoneHunt's last substantial asset before plaintiff's claims were reinstated.

5. Subsection (b)(8): The value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred.
StoneHunt's agent, Sellars, proposed that defendants purchase the subject property for $1.1 million, which was significantly less than half of the $2.5 million value of the land that agent Sellars represented as the land's worth.

6. Subsection (b)(9): The debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred.
Subsequent to the debtor StoneHunt's transfer of the title to the subject property to defendants on 2 February 2017 which left StoneHunt with only a small amount of cash money and a $900,000 promissory note as StoneHunt's remaining assets, StoneHunt filed for bankruptcy on 29 August 2018. StoneHunt had not been able to pay its bills as they became due, and very soon after StoneHunt transferred the subject property, a fair evaluation of StoneHunt's debts exceeded the value of its assets. In coupling our assessment of the presence and persuasiveness of these statutory factors enumerated in N.C.G.S. § 39-23.4(b) with additional non-statutory factors which we find existent and enlightening in the present case concerning the determination of StoneHunt's intent to defraud its creditor - here, plaintiff - under N.C.G.S. § 39-23.4(a)(1) and the imputation of knowledge of the facts as StoneHunt knew them at the time of StoneHunt's implementation of the debtor's intent, such as (1) the lack of the obtainment of a formal appraisal prior to defendants' purchase of the subject property from StoneHunt, (2) defendants' ready agreement to StoneHunt's proposed sales price of the subject property without any material negotiation, (3) defendants' willingness to accommodate StoneHunt's desire for an expeditious transfer of the land's title in light of the prospect of a Court of Appeals decision reinstating plaintiff's claims against StoneHunt after StoneHunt's unequivocal e-mails to defendants' agents that the Court of Appeals "may have a decision fairly quickly" on plaintiff's appeal and therefore it was advisable "to try to get this [subject property sale] done as soon as possible[,]" (4) the fact that StoneHunt and defendants dissolved their joint venture to develop the subject property on the same day - 2 February 2017 - that defendants obtained title to the subject property from StoneHunt, (5) StoneHunt's favoritism of defendants to the detriment of plaintiff, and (6) StoneHunt's preference to sell the subject property to defendants outright rather than to contribute the land to their joint venture so that the subject property would not have been an ownership asset of StoneHunt that would be available to creditors such as plaintiff and to prevent plaintiff from collecting anything on a judgment, we determine that these non-statutory factors are consistent with the emblematic statutory factors found in N.C.G.S. § 39-23.4(b) to establish that the transfer of land by StoneHunt to defendants which was fraudulently performed is voidable as to plaintiff in plaintiff's capacity as StoneHunt's creditor, because as a debtor - and as expressly determined by the trial court - StoneHunt made the transfer with the intent to defraud plaintiff in plaintiff's role as StoneHunt's creditor. In recognizing the binding nature of these extensive and comprehensive findings of fact by the trial court upon this Court because they are either unchallenged on appeal or because they are supported by any competent evidence, the trial court erred as a matter of law in its failure to indicate its consideration of the imputation of knowledge of StoneHunt's fraudulent actions to defendants in defendants' capacity as a co principal of StoneHunt in their joint real estate development venture and the resulting common law recognition of their principal-agent relationship wherein defendants are charged with the knowledge of StoneHunt which was acquired by StoneHunt in the course of defendants' business pursuits with StoneHunt. The facts, as found by the trial court, compel the imputation of knowledge to defendants of StoneHunt's fraudulent activities as StoneHunt knew these activities to be fraudulent at the time of their commission, consequently rendering the transfer of the subject property to defendants by StoneHunt to be voidable as to plaintiff and thus denying defendants' ability, under these facts and circumstances, to be a good faith purchaser for value of the subject property.

Justice Barringer filed an opinion concurring in part and dissenting in part joined by Chief Justice Newby. The Justice opined that the Court of Appeals was correct in its holding that the trial court's finding of fact that the defendant, MAP, was a good faith purchaser was supported by competent evidence.

Citing Hill v. Pinelawn Mem'l Park, Inc., 304 N.C. 159 the dissenting opinion notes:

As found by the trial court, "[m]ere knowledge of a claim by a creditor that does not affect title does not preclude MAP from being a good faith purchaser." ... ("While actual notice of another unrecorded conveyance does not preclude the status of innocent purchaser for value, actual notice of pending litigation affecting title to the property does preclude such status." (emphasis added)). Moreover, no reinstatement of the lis pendens ever occurred.

Snipping a few statements and recitation of facts may give the best summary of the position of the dissenting Justice:

In reaching a contrary conclusion, the majority fails to consider the unique nature of the asset in dispute - real property - and neglects to contemplate the effect at the time of purchase of the trial court's previous cancellation of CCO's notice of lis pendens.


Further, because this is a real estate transaction, the doctrine of lis pendens applies. Under "[t]he firmly-established doctrine of lis pendens[,] . . . '[w]hen a person buys property pending an action of which he has notice, actual or presumed, in which the title to it is in issue, from one of the parties to the action, he is bound by the judgment in the action, just as the party from whom he bought would have been.'" Hill v. Pinelawn Mem'l Park, Inc., 304 N.C. 159, 163-64 (1981) (original emphasis omitted and emphasis added) (quoting Rollins v. Henry, 78 N.C. 342, 351 (1878)).


In this matter, the trial court found that prior to purchase, MAP had confirmed that the trial court had ruled that CCO's Case No. 1 had not affected the title of the Subject Property and had cancelled the lis pendens, that there was currently no lis pendens, that MAP's attorneys conducted a title search, and that MAP obtained a commitment from a title insurance company to insure the Subject Property's title as free and clear without any exception for any notice of lis pendens. MAP had also sought to purchase the property since 2013, long before any litigation by CCO. These facts are not in dispute, and on this basis, MAP argues it could not have acted in bad faith. These findings, which are supported by competent evidence, do support the finding of good faith. While the letter sent to MAP by CCO's attorney gave MAP actual notice of CCO's pending contract action against StoneHunt, the notice of lis pendens had already been cancelled by the trial court, indicating CCO had no valid claim to the Subject Property's title. Further, the property had been recently re-zoned by the Charlotte City Council. Had there been a cloud on the title, the rezoning would not have occurred. As found by the trial court, "[m]ere knowledge of a claim by a creditor that does not affect title does not preclude MAP from being a good faith purchaser." See Hill, 304 N.C. at 165 ("While actual notice of another unrecorded conveyance does not preclude the status of innocent purchaser for value, actual notice of pending litigation affecting title to the property does preclude such status." (emphasis added)).

Moreover, no reinstatement of the lis pendens ever occurred.


Most notably: MAP was on notice that CCO had no valid claims to the title of the Subject Property since the notice of lis pendens was cancelled, and that remains the law of this case. Furthermore, MAP conducted an independent investigation to ensure that the Subject Property's title was unencumbered, and MAP paid more than a reasonably equivalent value for the Subject Property. While ultimately CCO was left without a solvent entity from which to collect its judgment against StoneHunt in Case No. 1, subsection 39-23.8(a) provides MAP a complete defense to avoidance of StoneHunt's fraudulent transfer and such defense is assessed at the time of transfer. N.C.G.S. § 39-23.8, official cmt. (2014). Both precedent and the statutory enactments of our legislature compel that we leave this determination to the fact-finder.

The Dissent succinctly concluded:

Accordingly, we should adhere today to our role as an appellate court and decline to usurp the authority of the trial court by reweighing the evidence in this matter, even if our sympathies would encourage us to do otherwise. We should also recognize that to do otherwise would render real property purchasers subject to the will of an appellate court to determine issues better suited for a fact-finder and would undermine the certainty and predictability necessary to protect good faith purchasers of real property, lenders, and insurers of real property title.

As a result of the majority opinion and implicit in the dissenting opinion in this matter, the door is now opened wider for transactions to be set aside that may appear to be bona fide as reflected by the land records disclosed in a standard title search. The facts a set out in the majority opinion are very compelling and the opinion may be suggested as an example of the adage or legal maxim that "Hard cases make bad law." Fortunately, door opened widest by the opinion is primarily for an action against the immediate transferee. N.C.G.S. Section 39-23.8(b), "Defenses, liability, and protection of transferee or obligee" provides:

(b) To the extent a transfer is avoidable in an action by a creditor under G.S. 39-23.7(a)(1), the following rules apply:
(1) Except as otherwise provided in this section, the creditor may recover judgment for the value of the asset transferred, as adjusted under subsection (c) of this section, or the amount necessary to satisfy the creditor's claim, whichever is less. The judgment may be entered against any of the following:
a. The first transferee of the asset or the person for whose benefit the transfer was made.
b. An immediate or mediate transferee of the first transferee, other than any of the following (emphasis added)
1. A good-faith transferee that took for value.
2. An immediate or mediate good-faith transferee of a person described in sub-sub-subdivision 1. of this sub-subdivision.

The standard form of preliminary opinion on title approved jointly by the North Carolina Bar Association and the North Carolina Land Title Association for use by North Carolina attorneys contains certain standard exception on the reverse page. It enumerates eight that are not included in a normal search of the County records during examination of title and states:

Upon special request, additional investigation may be made, and Standard Exceptions numbered 2, 3, 4, 5, 6, 7 and 8 can be eliminated. Any such elimination is evidenced by the initialing of such exception in the left margin by the attorney.

Exception numbered 8. States:

Civil actions where no notice of lis pendens against subject property appears of record.

While it is, arguably therefore, not the uniform standard of practice to examine pending litigation for a seller, this opinion may suggest that it might be prudent for the prospective buyer to engage the examining attorney to do so.

View the Entire Newsletter -  Search

Follow Statewide_Title on Twitter       View Statewide Title's profile on LinkedIn