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Issue  108
Published:  7/1/2004

Bankruptcy/Foreclosure Procedures Derail Tax Foreclosure Title
Chris Burti, Vice President and Legal Counsel

Beneficial Mortgage Co. Of North Carolina, Inc v. The Barrington and Jones Law Firm, P.A., et al filed on May 4, 2004, NO. COA03-512 is a Court of Appeals opinion that would have tested the Wisdom of Solomon. The Court didn’t threaten to divide the baby, but that just might have produced the most equitable result. There are strong legal arguments for either position, yet we believe that the greater weight of authority favors the appellants. As a result, it unfortunately seems as if the title question remains, arguably, unresolved.

This is an appeal by the appellants Freddie McLean, Kanice Dee McLean and First-Citizens Bank & Trust Co., from summary judgment entered in Cumberland County Superior Court in favor of Beneficial Mortgage Co. of North Carolina, Inc. ("Beneficial"), on an action to quiet title and set aside a tax foreclosure sale. The facts reported in the appellate decision are extensive.

Mr. and Mrs. Douglas L. Horne ("the Hornes") acquired the subject property in 1978. In 1990, the Hornes encumbered the property with a deed of trust to secure a loan from First Union Mortgage Corporation, which was then assigned to Source One Mortgage Services Corporation ("Source One"). The Hornes defaulted on the loan and a substitute trustee was appointed ("foreclosure trustee") who then commenced a foreclosure action in 1995. On May 15, 1995, a Report of Foreclosure Sale was filed. Source One purchased the property at the public sale. On May 25, prior to the expiration of the 10-day upset bid period, the Hornes filed bankruptcy triggering the automatic stay of the foreclosure sale. While the bankruptcy proceeding was pending, a Trustee's Deed purporting to convey the property to Source One was executed by the foreclosure trustee on June 19, and recorded on June 23. On July 13, a recall of a Writ of Possession making reference to the bankruptcy proceeding was entered in the foreclosure proceeding. The foreclosure trustee filed a motion in the Bankruptcy Court in early August to annul the automatic stay so that the foreclosure sale could be completed.

The Bankruptcy Judge, Honorable A. Thomas Small, denied an immediate annulment. Instead he ordered that: "Should Debtors fail to sell the Real Property and distribute the proceeds on or before January 15, 1996, the automatic stay shall be annulled and Movant will be deemed the owner of the Real Property and entitled to pursue any and all nonbankruptcy remedies to obtain possession of the Real Property." (Emphasis added.)

The Court delineates the two competing chains of title, which we paraphrase for brevity and accuracy. It appears that the Court confuses the concept of title, which is at issue in this case, with chain of title which is merely the record of the instruments purporting to convey title, which is apparently undisputed.

  1. Beneficial's Chain of Title

On March 18, 1996, entered into with Beneficial for the principle amount of $50,000.

A general warranty deed was recorded on March 25, 1996, over two months after the January 15 deadline for selling the property to avoid annulling the stay as ordered by Judge Small. The deed conveyed the property from the Hornes to the son of Mr. and Mrs. Horne ("Douglas). A deed of trust for the property also recorded on March 25 in favor of Beneficial securing a line of credit. On May 16, a Certificate of Satisfaction was registered, showed the Hornes had satisfied their debt with Source One. A second deed of trust in favor of Beneficial for an increased principal amount was duly recorded on April 11, 1997. This second line of credit was drawn in part to pay off the first line of credit and deed of trust.

Beneficial was granted summary judgment by the trial court finding that Douglas remains the record owner of the property through this chain of title.

II. Appellants' Chain of Title

The appellants chain of title begins with the foreclosure trustee’s deed noted above. Judge Small's order provided that automatic stay would be annulled if the Hornes did not sell their property by January 15, 1996 deadline and that Source One was the fee simple owner.

On September 28, 1999, Cumberland County filed a complaint for property tax foreclosure on the property, naming Source One as the only defendant. Source One defaulted and the property was sold to Freddie McLean. A commissioner's deed, conveying the property was recorded on September 20, 2000. First-Citizen holds a deed of trust, recorded December 7, 2000, securing a loan to Mr. McLean.

With two such competing chains of title, interpreting the effect of Judge Small's order, annulling the stay over the foreclosing trustee's ability to foreclose when the Hornes did not meet the deadline in his order will determine who is vested with title to the property. In this appeal, appellants contended that the trial court should have granted their motion for judgment on the pleadings or summary judgment and that the trial court erred in granting summary judgment in favor of Beneficial.

The Court of Appeals stated that the key issue in this case concerns the relationship between North Carolina foreclosure law and federal bankruptcy law. In analyzing those issues they ruled that the trial court correctly ordered summary judgment in favor of Beneficial. The Court delineates an excellent analysis of this interrelationship. Space does not permit further discussion of this analysis at this time, but this opinion should be considered mandatory reading for practitioners dealing with a foreclosure proceeding where a bankruptcy petition is filed during the raised bid period.

We believe the Court of Appeals goes astray in this decision with the following language:

"We do not believe our broader reading of "lifted" (referencing the requirement of N.C.G.S. Section 45-21.22(c) for re-advertising and resale) moots or makes superfluous the express language of 11 U.S.C. § 362(d), specifically as to the effect of an "annulment" of a bankruptcy stay. Defendant cites cases from the Third, Fifth, Sixth, Ninth, and Eleventh Federal Circuit Court of Appeals which have all agreed that an order annulling a stay under § 362(d) grants retroactive relief from the stay, validating actions taken after the stay was in place that would otherwise be void as in violation of the stay. See In Re Siciliano, 13 F.3d 748, 751 (3d Cir. 1994) (a foreclosure sale); Sikes, 881 F.2d at 178-79 (filing a personal injury claim); Easley v. Pettibone Michigan Corp., 990 F.2d 905, 909-11 (6th Cir. 1993) (filing a products liability suit); In Re Schwartz, 954 F.2d 569, 572-73 (9th Cir. 1992) (a tax assessment was not in violation of a stay if the stay is deemed annulled); and In re Albany Partners, Ltd., 749 F.2d 670, 675 (11th Cir. 1984) (foreclosure sale). Though not bound by this precedent, we acknowledge the points in law set out therein as to the effect of a bankruptcy court annulling a stay. However, we do not see them on point with the issue of this case as they deal with the void/voidable issue of an action taken in violation of the automatic stay. See Winters by & through McMahon v. George Mason Bank, 94 F.3d 130, 136 (4th Cir. 1996) (the Fourth Circuit declined on deciding the void/voidable issue, finding the plaintiff in the case lacked standing)."

We believe that the Court dismisses the issue of void/voidable too easily. Modern courts seem to either lack understanding of the doctrine or lack perspective of its crucial importance to certainty in reliance on land records. A fair generalization of this doctrine can be succinctly stated. Void conveyances are void ab initio and can not convey title unless given life by corrective legislation or judicial intervention. Voidable conveyances can not be invalidated as against a purchaser for value under a recorded instrument without notice. Title examiners rely on these doctrines in order to determine property ownership.

This case deals with North Carolina law governing a power of sale foreclosure upon the lifting of an automatic stay applied to an act taken in violation of the stay. The Court states that "N.C. Gen. Stat. § 45-21.22(c) provides extra protection to a mortgagor against a power of sale foreclosure, even upon an annulment of a bankruptcy stay." We believe this to be an overstatement. It seems clear that this is not a protective statute, but rather, a procedural one. As the Court notes Judge Small has opined that the term "lifted" is slang. It is unfortunate that our legislature used it in the statute because in the case of a modification, termination or conditioning, those actions take effect when granted. Prior to the adoption of the provision in issue, it was uncertain whether the trustee must start the proceeding over from the beginning under those events. The provisions of the statute now make very clear what must procedurally occur next in a foreclosure proceeding to complete the sale and they simply eliminate the uncertainty as to what is required.

Annulment however, relates back to the filing. It makes the stay a legal nullity ab initio. The word has a well-defined meaning and effect at law. The Court’s inclusion of annulment "Verba relata inesse videntur" in the term "lifting" ignores its plain meaning and seems to read more into the statute than was likely intended by the legislature. The bulk of the remainder of the opinion is worth reading as an excellent analysis of the application of N.C. Gen. Stat. § 45-21.22(c) if one ignores the issues of the distinction between void and violability and the effect of annulment.

The Court of Appeals’ construction of the term "annulment" and interpretation of Judge Small’s order leads to a real problem in that it overlooks the issue of res judicata. Judge Small ruled that "Should Debtors fail to sell the Real Property and distribute the proceeds on or before January 15, 1996, the automatic stay shall be annulled and Movant will be deemed the owner of the Real Property and entitled to pursue any and all nonbankruptcy remedies to obtaining possession of the Real Property." (Emphasis added.) This language is unequivocal and unambiguous. Immediately upon the filing of the petition in the Bankruptcy Court, the property became property of the Bankruptcy estate pursuant to the Bankruptcy code. At that time the Bankruptcy court became invested with in rem and subject matter jurisdiction and, one can infer from the opinion, personal jurisdiction over the parties to this appeal as well. The unambiguous wording of the order cancels the effect of the automatic stay and judicially validates the foreclosure trustee’s deed.

The Court of Appeals focused on the portion of the order that provided that One Source was "entitled to pursue any and all nonbankruptcy remedies to obtaining possession of the Real Property. (Emphasis added.)" Ordinary rules of construction require our courts to give words their plain meaning and effect. In as much as the Hornes were apparently still in possession of the property, One Source would ordinarily be required to go to the State courts to get an order of ejectment as provided under the foreclosure statutes. The decision of the Court of Appeals leaves one with the inference that Judge Small didn’t mean what he said or didn’t say what he meant. Either inference is clearly not valid with respect to a jurist of Judge Small’s demonstrated ability.

As we alluded to previously, this creates a title problem. There is a valid final order of a Federal court of competent jurisdiction unambiguously and unequivocally (once the deadline passed without the contingency being satisfied) vesting title in One Source and then through mesne conveyances resulting in title vested in the appellants. There is also is a valid final order of a State court of competent jurisdiction affirmed on appeal to the North Carolina Court of Appeals, unambiguously and unequivocally vesting title in the appellees. It is unlikely that any, fully informed, title insurer would be willing to insure this property until this conflict is finally resolved judicially unless they are already liable under an existing policy. Until that occurs the property will remain unmerchantable if not unmarketable.

There is no question that the acceptance by One Source of the ‘payoff’ after initiating and receiving the bankruptcy relief created this dilemma. The Court of Appeals, after declaring the foreclosure proceeding incomplete, reasoned that the acceptance of the payoff satisfied the Deed of Trust and nullified the power of sale. The cases cited by the Court support this position when there is an uncompleted foreclosure sale. It is also established law that a completed foreclosure sale extinguishes the equity of redemption. As much as the effect of the stay was annulled and the foreclosure statute doesn’t specifically address annulment, this opinion would inject uncertainty into title records when there is, otherwise, unambiguous wording in an order or judgment. Any order of a bankruptcy judge would potentially need to be litigated in state court to determine its effect on title. This potential outcome is clearly preempted by the express provisions of the Bankruptcy Code. While the Court discourses at length the protections afforded a debtor by the Act, it seems to have overlooked the provisions designed to promote judicial economy.

This Court apparently determined that it was more equitable for the appellants to bear the loss because their title was derived through a tax foreclosure sale than the appellees who chose to ignore Judge Small’s decision. The real problem is that One Source having received the requested relief, in effect, ‘sold’ the property to the appellee, Doug Horne, without providing a deed. It seems unlikely that Horne was unaware of the import of Judge Small’s order. If a Notice of foreclosure was recorded, he had notice under the recording acts. If One Source had literally sold the property to Horne without providing a deed, it is likely that they would be liable for reimbursing the proceeds.

Reissue Rates and Consumer Protection
Lawyers Title Insurance Corporation

Note: The following is reprinted in its entirety by permission from Lawyers Title Insurance Corporation. It is a memo sent by Lawyers Title to all its North Carolina agents. We at Statewide Title, Inc. pass this along to you, our real property practice attorneys, so that you will be reminded of the importance of ensuring that your clients are provided with the best title insurance premium rates and service. Please be assured that Statewide Title, Inc. supports your role as an advocate for the consumer.

Land America / Lawyers Title



From: Frank Coman

Date: June 11, 2004

Subject: Reissue rates and consumer protection


704-377-0093 / 800-868-6529

FAX: 704-377-1803 / 800-926-8692

Russell Goodman

North Carolina State Manager

Francis X. Coman

North Carolina State Counsel

NCGS 58-27-5, which prohibits the payment or receipt of title insurance kickbacks, rebates or commissions, was adopted in 1973. As a result of its adoption, residential closing attorneys here are no longer issuing agents for title insurers. A companion statute, NCGS 58-26-1, requires title insurance to be issued solely on the basis of an opinion of title from a North Carolina-licensed attorney that is not an employee or agent of the company. Since 1973 closing attorneys have assumed the role of advocate for the consumer, securing the best coverage available for them and their lenders, unaffected by any vested interest in the title insurance premium charged.

Although most title agents are well aware of the history of title insurance in this state and the role played by practicing attorneys in advocacy for the consumer, a reminder about reissue rates is necessary. A series of class action lawsuits have been brought in other states, claiming that homeowners were being overcharged for title insurance when refinancing their mortgages. The plaintiffs allege that title insurance companies and their agents overcharged them by failing to give them a refinance or reissue credit. Although we are confident that our agents in North Carolina have been properly passing on reissue discounts to borrowers and that independent approved attorneys have continued to be advocates for the consumer, we feel it is imperative to reemphasize the need to pass on those discounts. The class action bar, so aptly characterized by John Grisham in "The King of Torts, will be coming to a town near you soon!

In compliance with state law, Lawyers Title filed its full rate manual with the North Carolina Department of Insurance in 1991, and has filed various amendments thereto, the most recent of which was in October of 2002. As a member, Lawyers Title has also adopted the rates and form filings of the NC Title Insurance Rating Bureau as to insured closing protection insurance, charging an insured closing premium which runs to the benefit of both borrowers and lenders.

In our rate manual, "reissue rate" applies to discounts based on a prior owner, loan or leasehold policy issued by Lawyers Title or another approved company on the property to be insured within 20 years of the date of issuance of the new policy. The reissue rate is 50% of the basic rate up to the amount of the new policy. If more coverage is needed, the additional coverage is computed at basic rates in the applicable bracket or brackets.

A "substitution rate", sometimes called a "refinance rate", applies when a loan is made to the same borrower, secured by the same property, the title having been insured by Lawyers Title or another approved company at the time of the original loan. The time period of applicability of the "substitution rate" is 5 years from the date of the issuance of the original policy. The "substitution rate" is 30% of the basic rate up to the amount of the new policy. Likewise, if more coverage is needed the additional coverage is computed at basic rates in the applicable bracket or brackets.

As an agent you are expected to abide by our filed rates and corresponding company policy. Failure to do so could result in state disciplinary action by the Department of Insurance affecting you and us. In light of the class action litigation it could also result in significant liability to you as the agent and to us as the title insurer. As appropriate please remind the Approved Attorneys with whom you do business of their responsibility on behalf of the consumer, to seek all applicable reissue and refinance credits and make sure that all invoices issued in conjunction with the issuance of our commitments reflect the correct reissue/refinance premiums applicable to the specific transaction.

We appreciate our agents. If you have any questions about the applicability of any title insurance rates in this state, please contact me at 704-377-0093.

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