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Issue 206 Article 340
Borrower's Quiet Title, Good Faith and Fair Dealing Allegations Survive Lender's Dismissal Motions
Chris Burti, Vice President and Senior Legal Counsel
Mejorado v. CitiMortgage, INC., DCNC, No. 2:12-CV-59-H (2013) illustrates the train wreck that can result from a foreclosure proceeding where it appears that the mortgagee's left hand was unaware of or oblivious to what its right hand was doing. It is a further illustration of the black letter law that a forged conveyance transfers no interest. For a transfer to be effected there must be intent to convey and delivery of the instrument by the owner, and acceptance by the grantee. If the actual mortgagor has not executed and delivered the deed of trust, and it instead bears a forged signature, there is no intent on the part of the mortgagor for the mortgage lien, and the forged deed of trust can have no legal effect. It is hornbook law that if it's forged, it's void.
This matter was heard before Malcolm J. Howard, Senior District Judge DCNC, Northern Jurisdiction, on a motion to dismiss plaintiff's complaint for failure to state a claim filed by the defendant CitiMortgage. The plaintiff brought this action in State court in 2012 seeking to prevent defendants from foreclosing on her home and also claiming monetary damages. The subject property was purchased by the plaintiff and her husband in 1999. When the parties separated in 2002, the ex-husband was ordered to provide plaintiff with a home in which she and her children would reside and to make the monthly mortgage payments on the home in a family court proceeding. In September of 2002, he obtained a loan in the amount of $81,400 from ABN AMRO Mortgage Group ("ABN AMRO"), the proceeds of which were used to purchase a mobile home that was placed on the subject property. As part of the loan transaction, he executed a note and deed of trust in favor of ABN AMRO encumbering his interest in the subject property as security for the loan. The opinion states that the plaintiff denied that she signed the deed of trust and indicates that she claimed that her signature was forged.
The ex-husband stopped making payments on the loan in 2007, and plaintiff began communicating directly with CitiMortgage, ABN AMRO's successor in interest, about the loan. The plaintiff's complaint alleged that she was unaware of the deed of trust on the subject property until 2008 "when a judge in her domestic proceedings 'suggested . . . that she go to the Register of Deeds office to see if her property had been put up for collateral.'" CitiMortgage began foreclosure proceedings and plaintiff contested the foreclosure, but after hearing the matter, the Clerk of Court entered an order allowing the foreclosure. On appeal, the plaintiff filed a memorandum in opposition to foreclosure contending that CitiMortgage did not prove the existence of an enforceable deed of trust because her purported signature on the deed of trust is a forgery. (The appeal of the foreclosure proceedings was reported as still pending in Superior Court at the writing of this appellate decision).
Subsequently, plaintiff and CitiMortgage engaged in further negotiations, and the parties entered into an "Interim Forbearance Agreement whereby CitiMortgage agreed to 'suspend any scheduled foreclosure sale' while plaintiff was being reviewed for a loan modification plan under the federal government's Home Affordable Modification Program." The agreement apparently did not result in a written, executed, final loan modification plan. The plaintiff subsequently filed this action in Superior Court and CitiMortgage removed the action to Federal District Court based on diversity jurisdiction.
The plaintiff characterized her complaint as being "in Recoupment and in Equitable Defense of Foreclosure (pursuant to N.C. G. S. § 45-21.34)". She was asking the court to quiet title to her home, alleging that her purported signature on the deed of trust was a forgery and asking for an order removing the cloud on title by "striking the deed of trust from the land records". While we have previously noted that there is no subject matter jurisdiction for a North Carolina court to order a Register of Deeds to strike a document from the records due to the fact that there is no statutory or implied authority for a Register of Deeds to redact any public record other than Social Security Numbers and certain other personal indentifying information, the opinion was issued as a response to the motion to dismiss and the issue wasn't addressed. Likewise, a federal court would be wanting in such jurisdiction. While the court may find facts allowing it to determine that deed of trust in question to be void as to the defendant, and while it cannot order the Register of Deeds to redact the public records, it certainly can direct the recordation of its order finding the deed of trust void as to the plaintiff.
CitiMortgage sought dismissal alleging that the claim was barred by the statute of limitations, that the plaintiff is not permitted to challenge the validity of the debt outside of the foreclosure proceeding, that the plaintiff's claims for breach of loan servicing duties & implied covenant of good faith and fair dealing and that her claims for unfair or deceptive trade practices were not supported by the pleadings. The court disagreed and denied CitiMortgage's motion to dismiss.
CitiMortgage argued the applicability of the three-year statute of limitations provided in N.C.G.S. Section 1-52 (9) with respect to the plaintiff's claims because she was seeking relief on the grounds of fraud. The court acknowledges the applicability of the statute to such claims and then it observed that; "North Carolina courts have held that the statute of limitations does not run against a plaintiff seeking to quiet title while he is in possession of the property. Poore v. Swan Quarter Farms, Inc., 338 S.E.2d 817, 819-20 (N.C. Ct. App. 1986); see also Oates v. Nelson, 269 C.A.2d 18, 74 Cal. Rptr. 475 (1969), cited with approval in Poore, 338 S.E.2d 817. As the Poore court noted:
The purpose of a Statute of Limitations is to put an end to stale claims, not to compel resort to the courts to vindicate rights which have not been and might never be called into question. The requirement of prompt action is imposed as a policy matter upon persons who would challenge title to property rather than those who seek to quiet title to their land. Poore, 338 S.E.2d at 820 (quoting Orange & Rockland Util. v. Philwood Estates, 418 N.E.2d 1310, 1313 (N.Y. 1981)). As plaintiff has been in possession of the subject property at all times relevant to this action, no statute of limitations has begun running against her claim to quiet title to the property."
On the issue claiming that the plaintiff was barred from challenging the validity of the debt outside of the foreclosure proceeding before the clerk of court, the court stated that it was unaware of any authority to support that claim." Citing Gilbert v. Residential Funding LLC, 678 F. 3d 271, 280-81 (4th Cir. 2012), the court acknowledged that the plaintiff was entitled to raise the issue of the validity of the debt before the clerk of court and on appeal from the clerk of court's order allowing foreclosure and in fact did so in this case. Pursuant to the doctrines of res judicata or collateral estoppel, the plaintiff would ordinarily be prohibited from litigating such issues further after final judgment in the foreclosure proceeding. The court determined that as no final judgment has been entered in the foreclosure proceeding, res judicata and collateral estoppel principles do not apply.
The plaintiff was privileged to bring a separate state-court action to quiet title to her property. The court further observed that N.C.G.S. Section 45-21.34 specifically authorizes a property owner to bring a separate action to enjoin foreclosure. The court suggests that it would have been appropriate for the State trial court to consolidate the actions had not CitiMortgage removed the quiet title action to federal court.
CitiMortgage's motion to dismiss plaintiff's claims for breach of loan servicing duties and breach of the covenant of good faith and fair dealing was like wise rejected by the court. The court's analysis is succinct and it may be clearer if we simply quote it with minimal editing for brevity (federal citations omitted). The opinion states that the "plaintiff essentially asserts that CitiMortgage breached its duties under its forbearance agreement with plaintiff. CitiMortgage contends that plaintiff's breach of loan servicing duties claim is subject to dismissal because plaintiff has not 'identif[ied] any term of the Forbearance Agreement which was breached and [p]laintiff cannot claim that she was owed any duty of care by CitiMortgage.' ... As to plaintiff's implied covenant of good faith and fair dealing claim, CitiMortgage argues that dismissal is warranted because plaintiff's allegations that CitiMortgage failed to comply 'with the express terms of the Interim Forbearance Agreement is a pure breach of contract claim that cannot be stated as an implied duty of good faith claim.' ...".
"Plaintiff's claims for breach of loan servicing duties and implied covenant of good faith and fair dealing adequately state a claim for breach of the forbearance agreement. Plaintiff has not, however, stated any facts that would support a separate and distinct tort claim for breach of the covenant of good faith and fair dealing."
"North Carolina recognizes an implied covenant of good faith and fair dealing in every contract, ensuring that one party will not injure or interfere with the other's right to receive the benefit of the agreement. ..."Because the covenant of good faith and fair dealing is implied in a contract a claim for breach of that covenant typically is `part and parcel' of a claim for breach of contract." ... "[I]n most cases a breach of the covenant [of good faith and fair dealing] is simply another way of stating a claim for breach of contract... In the case at bar, plaintiff alleges that CitiMortgage breached the covenant of good faith and fair dealing by (1) "failing to service Plaintiff's account in accordance with the terms of the Forbearance Agreement"; (2) "failing to supervise its agents and employees including, without limitation, its loss mitigation, and collection personnel, who were instructed to proceed with foreclosure proceedings after a [f]orbearance agreement was formed to resolve the mortgage account issues with the Plaintiff"; and (3) "failing to provide Plaintiff with the benefit of her bargain." ... These allegations sufficiently state a breach of contract and will, therefore, be construed as such."
CitiMortgage also argued that the plaintiff failed to allege any fraudulent or deceptive acts in support of her unfair or deceptive trade practices claim. The court notes that "there are three elements to a claim of unfair or deceptive trade practices under North Carolina's Unfair and Deceptive Trade Practices Act, N.C. Gen. Stat. § 75-1.1 et seq.: '(1) an unfair or deceptive act or practice, or an unfair method of competition, (2) in or affecting commerce, (3) which proximately caused actual injury to the plaintiff or his business.' Spartan Leasing, Inc. v. Pollard, 101 N.C. App. 450, 460-61, 400 S.E.2d 476, 482 (1991). In support of her claim, plaintiff alleges that (i) CitiMortgage refused on more than one occasion to deal with plaintiff or provide her with information about the loan even after she entered into a forbearance agreement with CitiMortgage, (ii) in 2007 CitiMortgage told plaintiff that the mobile home would be removed from her property in lieu of foreclosure of the subject property, (iii) CitiMortgage attempted to collect from plaintiff a delinquency for which she was not responsible, (iv) CitiMortgage wrongfully charged plaintiff for insurance, (v) CitiMortgage reported plaintiff to the credit bureaus for arrearages for which she is not responsible, and (vi) CitiMortgage undermined plaintiff's ability to maintain the forbearance agreement and ultimately sought to foreclose upon the subject property based upon an invalid deed of trust. ..." The court found the allegation sufficient to state a claim irrespective of the fact that she might not be ultimately able to marshal sufficient evidence to prove them.
Thus the question of the forgery survives to be litigated as well as the plaintiff's other claims. The message to take from this case is that whether one chooses federal or state courts for relief, foreclosure in North Carolina should not be taken lightly as it is not like condemnation cases where the outcome is reasonably certain and only the price is in question, but rather there are clearly remedies for claims for relief if the foreclosure process is mishandled and the respondent damaged as a result.