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Issue  285  Article  439
Published:  10/1/2022

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In re: Simmons (COA 21-682) 10/4/2022
Foreclosure Voided Due to Lack of Notice of Trustee Neutrality

Chris Burti, Vice President and Senior Legal Counsel

Plaintiffs in this matter appealed from a trial court order denying their motion to set aside a foreclosure action under Rule 60(b) of the North Carolina Rules of Civil Procedure. They contended that they were entitled to their motion because:

(1) the trustee failed to include a notice of trustee neutrality in the notice of the foreclosure hearing;
(2) the trustee acted as the foreclosure attorney for the noteholder; and
(3) the trustee was the loan closing attorney for the foreclosure loan.

For these reasons, the Court of Appeals agreed that the trial court erred in denying the motion and reversed the trial court's order denying the plaintiffs' motion to set aside the foreclosure procedure under Rule 60(b) of the North Carolina Rules of Civil Procedure.

The facts as presented in the opinion were that Plaintiffs refinanced a mortgage for property they owned and two years later the closing attorney sent a letter on his legal letterhead informing that the noteholders contacted the attorney because the borrower had "made no payments on the debt." The attorney requested in the letter that the borrower "contact [his] office to make arrangements to execute a deed to transfer the property back ..., in lieu of foreclosure..." referring to the noteholders as his "clients" in the letter.

Subsequently, the closing attorney sent the plaintiffs another letter on his letterhead to inform them that he had been "retained by [the noteholders], to initiate a foreclosure proceeding" on the property. About three months later he filed a notice of foreclosure hearing he signed as "Trustee." The foreclosure proceeded in due course, however the closing attorney as Trustee did not include any notice of trustee neutrality in the notice of foreclosure hearing, as required by N.C.G.S. Section 45-12.16(c)(7)(b). The noteholders were the high bidders and the closing attorney as Trustee filed a trustee's deed conveying the property to them.

The plaintiffs filed their Rule 60(b) motion in the foreclosure proceeding which the Clerk of Superior Court denied. They, in turn, appealed to the Superior Court, which denied the motion, after a de novo review giving rise to this appeal.

The opinion points out that the appellate review of such a denial is limited to the question of abuse of the trial court's discretion which is a relatively high standard.

"[A] motion for relief under [N.C.] Gen. Stat. § 1A-1, N.C. R. Civ. P. 60(b) is addressed to the sound discretion of the trial court and appellate review is limited to determining whether the court abused its discretion." Sink v. Easter, 288 N.C. 183, 194, 217 S.E.2d 532, 539 (1975). "A judge is subject to reversal for abuse of discretion only upon a showing by a litigant that the challenged actions are manifestly unsupported by reason." Clark v. Clark, 301 N.C. 123, 129, 271 S.E.2d 58, 63 (1980). ¶ 11 Under Rule 60(b), a trial court may "relieve a party or his legal representative from a final judgment, order, or proceeding" for various reasons, including that "[t]he judgment is void." N.C. Gen. Stat. § 1A-1, Rules 60(b)(4) (2021). "A judgment is void . . . when the issuing court has no jurisdiction over the parties or subject matter in question or has no authority to render the judgment entered." Burton v. Blanton, 107 N.C. App. 615, 616, 421 S.E.2d 381, 382 (1992). "Where jurisdiction is statutory and the Legislature requires the Court to exercise its jurisdiction in a certain manner, to follow a certain procedure, or otherwise subjects the Court to certain limitations, an act of the Court beyond these limits is in excess of its jurisdiction." In re T.R.P., 360 N.C. 588, 590, 636 S.E.2d 787, 790 (2006) (citations omitted).

The Court of Appeals notes that the statutory authorization for the private power of sale procedure under N.C.G.S. Chapter 45 requires that that notice of foreclosure hearings must include, "[a] statement that the trustee, or substitute trustee, is a neutral party and, while holding that position in the foreclosure proceeding, may not advocate for the secured creditor or for the debtor in the foreclosure proceeding," and that N.C.G.S. Section 45-10(a) explicitly prohibits an attorney serving as the trustee from representing the noteholders in a foreclosure proceeding: "An attorney who serves as the trustee or substitute trustee shall not represent either the noteholders or the interests of the borrower while initiating a foreclosure proceeding."

The facts as presented in the opinion clearly indicated that closing attorney failed to comply in all respects to these requirements, leading the Court to observe that:

"[W]hile a power of sale provision is meant to function as a more expeditious and less expensive alternative to a foreclosure by action, foreclosure under a power of sale is not favored in the law, and its exercise will be watched with jealousy." In re Adams, 204 N.C. App. 318, 321, 693 S.E.2d 705, 708 (2010). In this case, not only did [the closing attorney] fail to provide Plaintiffs with any notice of his duty to remain neutral in the foreclosure proceedings, he affirmatively advocated for the noteholders throughout the foreclosure process. Allowing the foreclosure to proceed on these facts would eviscerate the requirement that trustees remain neutral in foreclosure proceedings. The trial court's order must be reversed and remanded for entry of an order setting aside the order allowing the foreclosure sale.

The relief granted in this opinion demonstrates the need for title examiners to both be familiar with the technical requirements of N.C.G.S. Chapter 45 power of sale foreclosures and to review foreclosure files in the chain of title for substantial compliance. This is especially important for attorneys opining on title directly resulting from a current foreclosure sale.

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