When a title examination reveals a deed in the chain of title from a trustee in foreclosure questions frequently arise as to the insurability of the title. North Carolina specifies who must receive notice and this article will address concerns as to the adequacy of the statutory requirements and our views on the insurability of the title in cases where there are subordinate liens of record.
1. Liens other than federal tax liens.
G.S. 45-21.16 pertains to notice and hearing in a power of sale foreclosure of a mortgage or deed of trust.
Pursuant to G.S. 45-21.16(a), a notice of hearing must be filed by the mortgagee in a mortgage or by the trustee in a deed of trust. The notice of hearing must be served upon the person obligated to repay the indebtedness, any person to whom the mortgage or deed of trust directs notice to be sent in the event of default and every "record owner." G.S. 45-21(b). Specifically, G.S. 45-21.16(b) states that "record owner" does not include the holder of a mortgage, deed of trust, judgment, mechanics or materialmens lien, other liens, or tenants in possession under unrecorded leases. The notice of hearing can constitute a notice of sale. G.S. 45-21.16(c)(10).
G.S. 45-21.16(d) outlines the clerks hearing procedure. The clerk will either find or not find the existence of (1) a valid debt; (2) a default; (3) a right to foreclose the instrument and (4) notice to those entitled under G.S. 45-21.16(b). If there is a favorable finding for foreclosure, the clerk will authorize notice of sale, which sale may be conducted once an authorization or order is entered. The statute states that the clerks action is an appealable judicial act. G.S. 45-21.16(d1). This seems to qualify as "state action," mentioned below.
G.S. 45-21.16A sets forth the contents of the notice of sale. G.S. 45-21.17 sets forth the posting and publication requirements pertaining to this notice. G.S. 45.21.17(4) requires that the notice of sale be mailed by first-class mail at least 20 days prior to the date of the sale to each party entitled to notice of hearing by G.S. 45.21.16. As noted above, that does not include subordinate lienors. But the notice of sale must also be mailed to parties filing a request for notice under G.S. 45-21.17A. G.S. 45-21.17(4). If the notice of hearing also contains all of the notice of sale information, the notice of hearing can constitute a notice of sale. G.S. 45-21.17(4). G.S. 45-21.17A(f) sets forth a limitation on the time for bringing an action to set aside a foreclosure sale for failing to comply with G.S. 45-21.17A.
The case of Mennonite Board of Missions v. Adams, 462 U.S. 791, 103 S. Ct. 2706, 77 L.Ed.2d 180 (1983), discussed in E. Urban and G. Whitney, North Carolina Real Estate § 14-14 (Harrison Co. 1996), should be noted. In that case, a tax foreclosure sale was conducted. The statute provided for posting and publication and notice by certified mail to the owner. No statutory provision was made for personal or mailed notice to subordinate lienors. In this case, the mortgagee learned of the sale two years later after the redemption period expired. The Supreme Court held that the notice by posting and publication did not meet the standards of the due process clause of the 14th Amendment to the U.S. Constitution. The court stated that the state statute must provide notice reasonably calculated, under all circumstances, to apprise interested parties of the pending of the action and afford them an opportunity to present their objections. A mortgagee has a legally protected property interest and is entitled to notice reasonably calculated to apprise him of the pending of the sale. Personal service by mail or notice is required even though sophisticated creditors have means to discover tax delinquency and sale pendency.
It would seem that there is, arguably, sufficient "state action" to make Mennonite applicable to a power of sale foreclosure and to require proper notice even if the subordinate lienor did not file a request for notice under G.S. 45-21.17A. E. Urban and G. Whitney, supra. Also, it would seem that notice of sale under G.S. 45-21.16A and G.S. 45-21.17 is what Mennonite requires. Notice of hearing to a subordinate lien holder under G.S. 45-21.16 should not be required given its purpose set forth in G.S. 45-21.16(d) (unless the notice of hearing serves as the notice of sale). But it cannot hurt to give a subordinate lienor notice of hearing to overcome the opposing argument that the lienor might have, for example, information regarding the validity of the debt that the owner does not have or does not present.
Some cases from other jurisdictions indicate that if the subordinate lienholder has the statutory opportunity to request notice but does not, this failure does not waive Mennonite notice requirements. Davis Oil Co. v. Mills, 873 F.2d 774 (5th Cir. 1989); 48 Louisiana L. Rev. 536, 585 - 586 (1988).
In cases where the Mennonite notice is not given, a title insurer can consider giving coverage over the problem if there is no equity above the amount owed under the foreclosed instrument, or other helpful circumstances exist, such as lapse of a substantial period of time or the subordinate lien holder being defunct, deceased or impossible to find.
Incidentally, a subordinate unfiled claim of lien under Chapter 44A might be protected by Mennonite when the foreclosing lender has actual knowledge of the unfiled lien and claimant.
2. Federal tax liens.
Subordinate federal tax liens present a special federal statutory problem in addition to Mennonite issues. 26 U.S.C. § 7425(b) must be consulted. As pointed out in E. Urban and G. Whitney, North Carolina Real Estate § § 21-47 and 14-14(c) (1996), if the federal tax lien is filed more than 30 days prior to the date of the foreclosure sale, and the United States is not given notice of sale in writing, by registered or certified mail or by personal service, not less than 25 days prior to the date of sale, the foreclosure will be subject to the otherwise inferior federal tax lien. 26 U.S.C. § 7425(b). The required form notice is set forth in Treas. Reg. § 301. 7425-3(d)(1) and is reproduced in E. Urban and G. Whitney, supra, at § 21-47. As those authors point out, a filed subordinate federal tax lien will be cut off by the foreclosure (1) if the notice required above is given or (2) if the federal tax lien is not properly filed more than 30 days prior to the date of sale. The district director of the IRS can consent to the sale free and clear of its tax lien in cases where the rule above would require notice. E. Urban and G. Whitney, supra, at § 21-47(c); 26 U.S.C. § 7425 (c)(2).
The United States has a right to redeem within 120 days from the date of the foreclosure sale in cases where the federal tax lien is cut off by the foreclosure or where the United States consents to a sale free and clear of the tax lien as noted above. E. Urban and G. Whitney, supra, at § 21-47(d), discussing 26 U.S.C. § 7425(d) and pertinent IRS regulations.
It seems arguable that Mennonite would require notice of sale even when notice is not required for a subordinate federal tax lien as noted above other than when the United States consents, but this is uncertain given the express provisions of 26 U.S.C. § 7425(b)(2)(A) dispensing with notice when the federal tax lien is not filed more than 30 days prior to the date of sale, since 7425(b)(2)(A) could be construed as an express waiver of notice of sale.
The title examiner and the foreclosing attorney should be sensitive to the uncertainties and potential pitfalls inherent in foreclosing a deed of trust against subordinate liens. Caution and conservative practice are recommended and the assistance of your title insurer regarding issues of insurability when notice is not given is important.