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Issue  28  Article  67
Published:  11/1/1997

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Raise Equitable Defenses to Foreclosure in Superior Court
Alex Kenny, Legal Counsel

Meehan v. Cable, 489 SE2nd 440 (N.C.App. 1997), is a recent North Carolina Court of Appeals case which addresses equitable defenses in a foreclosure case. In Meehan, the court held that the property place to raise equitable defenses to enjoin a foreclosure is in Superior Court, not in the foreclosure hearing itself. The court’s reasoning is that the clerk of court can only consider four issues at a foreclosure hearing: (1) whether there is a valid debt; (2) whether there is default; (3) whether the trustee has the right to foreclose; and (4) whether sufficient notice was provided to record owners.

In Meehan, John Thomas Meehan, the plaintiff, purchased a tract of land from Dorothy Ann Cable, the defendant. Meehan secured the unpaid portion of the purchase price with a purchase money mortgage and a deed f trust which provided for monthly payments. Meehan made inconsistent payments for approximately eight years until Cable filed a foreclosure petition. Meehan alleged Cable demanded payments in excess of what was owed and filed a separate action seeking to enjoin the foreclosure and requesting a proper accounting. Meehan then filed amended complaints in which he claimed that he was not in default, that the defendant was barred by waiver and estoppel from claiming default or accelerating payments and that Cable had anticipatorily breached the terms of the note. Meehan also alleged that the defendant’s actions violated the Federal Fair Debt Practices Act (15 U.S.C.A. 1692).

The trial court dismissed Meehan’s claims based on lack of jurisdiction, res judicata and collateral estoppel. The Court of Appeals relied on N.C.G.S. 45-21.34 to reverse and remand the trial court’s dismissal on lack of jurisdiction. N.C.G.S. 45-21.34 provides that anyone with a legal or equitable interest in real estate can apply to the Superior Court to enjoin a foreclosure sale before any of the parties’ rights become fixed. Therefore, Superior Court is the proper place to raise equitable defenses to a foreclosure sale.

The trial court also dismissed Meehan’s allegations that Cable was barred by waiver and estoppel from claiming default or accelerating payments and that defendants has anticipatorily breached the terms of the note based on res judicata and collateral estoppel. The Court of Appeals reversed this ruling and noted that the issue was one of collateral estoppel (where the same parties have different claims), not res judicata (where the same parties and the same claims as a prior action are involved). Because the Clerk of Court is limited to addressing only four issues at the foreclosure hearing (the existence of: a valid debt, default, the trustee’s right to foreclose, and sufficient notice), Meehan could not have raised his equitable defenses at the foreclosure hearing or at an appeal based on that hearing. Any equitable defenses to enjoin foreclosure must be raised under N.C.G.S. 45-21.34 (Enjoining Mortgage Sales on Equitable Grounds).

The Court of Appeals did affirm the trial court’s dismissal of Meehan’s claims under the Federal Fair Debt Collection Practices Act because damages under that act are limited to $1,000.00 per proceeding, while Superior Courts are to hear controversies which exceed $10,000.00.

In summary, in Meehan v. Cable the Court of Appeals held that equitable defenses to a foreclosure are properly raised in an action to enjoin the sale, that Superior Courts have jurisdiction to hear such claims and collateral estoppel is not a bar to hearing equitable defenses because such defenses cannot be raised in the Clerk’s foreclosure hearing under N.C.G.S. 45-21.16.

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