Found At: www.statewidetitle.com
Issue 294 Article 449
MidFirst Bank v. Brown (22-283) 12/06/2022
Sheriff's Sale Lien Priority, Equitable Subrogation, Debtor Misrepresentation
Chris Burti, Vice President and Senior Legal Counsel
The defendants in this case are mother and daughter. The property at issue is the mother's home purchased in 2000. In 2014, a 2010 South Carolina judgment against the mother was properly domesticated and docketed in North Carolina. In 2016 the mother refinanced her 2000 mortgage and the plaintiff is the holder of the new indebtedness. In 2019, the judgment creditor executed on the judgment in North Carolina, the daughter placed an upset bid after the sheriff's sale, became the high bidder and the sale was confirmed. Subsequently, the plaintiff filed its quiet title complaint seeking a declaratory judgment asking the court to rule that its deed of trust was still a lien the property after the sheriff's sale or that it was equitably subrogated to the priority of the original deed of trust.
The plaintiff and the defendants moved for summary judgment and the trial court granted plaintiff's motion for summary judgment and denied the defendants' motion who then timely appealed. For the reasons discussed below, the Court of Appeals reversed the order of the trial court and remanded for entry of summary judgment in the defendants' favor.
The defendants made three arguments on appeal as stated in the opinion:
- (1) the trial court erred in granting summary judgment to Plaintiff because the property was no longer subject to Plaintiff's lien after the execution sale;
- (2) the Sheriff's deed cannot dictate whether liens remain on real property; and
- (3) Plaintiff cannot rely on the doctrine of equitable subrogation for survival of its lien because it cannot claim that it was excusably ignorant of the publicly recorded judgment against the property.
The Court agreed with the defendants' first argument that following the execution sale, the subject property no longer secured the refinancing deed of trust. Citing N.C.G.S. Section 339.68(b) which provides that "[a]ny real property sold under execution remains subject to all liens which became effective prior to the lien of judgment pursuant to which the sale is held, in the same manner and to the same extent as if no such sale had been held." The Court noted that the statute explicitly deals with the status of liens that become effective after the lien of an executed judgment, but construed the statutory language to mean; "that liens recorded after a prior lien holder has executed and forced a sale are extinguished by the sale." The Court relied upon a "longstanding canon of statutory construction ... expressio unius est exclusio alterius, which means "the expression of one thing is the exclusion of the other." See Morrison v. Sears, Roebuck & Co., 319 N.C. 298, 303, 354 S.E.2d 495, 498 (1987)." In other words the exception of one thing evidences the Legislature's intent to exclude all other exceptions. Thus, by preserving prior liens, junior liens are not preserved because "the statute is silent on the status of liens that become effective after the lien of judgment under which an execution sale is held."
The defendants' second argument was that the Sheriff has no authority to subordinate liens and the following language in the Sheriff's deed could not lawfully have such an effect:
NO TITLE OPINION RENDERED. Deed remains subject to all liens and any encumbrances of any kind or nature (recorded or unrecorded) against the subject property, including without limitations a certain Deed of Trust recorded in the Mecklenburg County Register of Deeds on or about April 17, 2000, Book 11222 Page 893-911; a Deed of Trust filed on or about September 22, 2000, Book 11590 Page 792-798, and a Deed of Trust filed on or about June 28, 2001, Book 12385 Page 941-959; and any other restrictions, easements, rights of way, deeds of trust, liens, encumbrances, conveyances or any other clouds on title whatsoever related to prior transfers of and/or encumbrances on the subject property, whether filed or unfiled against the subject property. Purchaser was advised prior to the Sheriff's sale that it is very likely that this property is subject to the above and such conveyances, transfers, encumbrances or restrictions which are not extinguished by the Sheriff's sale or issuance of this Sheriff's Deed and Purchaser was advised to perform a full title search prior to purchasing the property subject to this Sheriff's Deed.
Addressing this contention the opinion states:
... the Sheriff's deed here cannot be construed to transfer the property subject to the ... lien. The deed simply provides a warning to the buyer that the property may be subject to any liens or encumbrances not extinguished by the sale. It notifies the buyer that they should conduct an independent title search to determine what liens or encumbrances, if any, remain attached the property at the time of the sale. The deed also specifically draws the grantee's attention to several deeds of trust that may encumber the property, none of which are the ... 2016 ...deed of trust.
Further, even where a deed or deed restriction unambiguously states a term or condition of transfer, it will not stand if it violates or is contravention to a provision of our General Statutes. (citation omitted).
Because, as we have held above, pursuant to N.C. Gen. Stat. § 1-339.68(b), liens which attach to a property after a judgment under which the execution sale took place are extinguished by that sale, the Sheriff's deed could not work in contravention to that statute and mandate that such a lien survives, and we decline to read it as doing so.
The defendants' final contention was that because the judgment was properly of record at the time the refinance deed of trust was recorded, the plaintiff was on notice and cannot establish excusable ignorance, therefore the remedy of equitable subrogation is not available. The Court of Appeals agreed with this contention as well. It seems that all appellate decisions dealing with the issue of equitable subrogation in North Carolina begin with a discussion of the North Carolina Supreme Court's decision in Peek v. Wachovia Bank & Tr. Co., 242 N.C. 1, 86 S.E.2d 745 (1955). The Court began there as well and sets out the rule established in Peek thusly:
[A]s a general rule one who furnishes money for the purpose of paying off an encumbrance on real or personal property, at the instance either of the owner of the property or of the holder of the encumbrance, either upon the express understanding or under circumstances from which an understanding will be implied, that the advance made is to be secured by a first lien on the property, will be subrogated to the rights of the prior lienholder as against the holder of an intervening lien, of which the lender was excusably ignorant.
Equitable subrogation, when applicable, will give equitable relief to a lender whose security is technically junior to an intervening lienholder when it has furnished the funds to satisfy the first lien. In some jurisdictions the right is absolute, in North Carolina, our recording statutes are favored and the lender claiming relief must show that reasonable excuse exists as to why notice under the acts should not apply and record priority control the lender must be "excusably ignorant". The opinion analyses a number of cases that address what facts constitute excusable ignorance in North Carolina and the Court observes:
Our equitable subrogation precedent has produced a bright-line rule for what excusable ignorance means, and we decline to do so here. Instead, we determine that it is a fact-intensive inquiry that depends on the specific circumstances of each case.
In this case, the plaintiff conceded that the judgment was publicly recorded but contended that it was excusably ignorant of that judgment because the mother checked a box that indicated that no liens or judgments encumbered the property when she filled out the refinancer loan documents at closing in 2016, the Court of Appeals was "unpersuaded by this argument."
The notion that a party cannot assert ignorance where the information is available via a public record or title search is not a novel one in our law. In claims of misrepresentation, we have held that a party cannot assert reasonable reliance on statements concerning matters in the public record where they failed to review those public records when they had the opportunity to do so. (citation omitted)
The panel unanimously reversed the trial court and remanded the case for entry of summary judgment in favor of the defendants. The Court acknowledged the plaintiff's contentions that the defendant mother's misrepresentations should not be rewarded, but clearly the court was not satisfied that the plaintiff had put forth sufficient facts to overcome the notice created by our recording acts. This case serves as a caution that title examinations must be diligently performed. Yet it also creates an outline of the nature of what factual record must be put forth to establish "excusable ignorance" in an equitable subrogation case.