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Issue  12
Published:  7/1/1996

Lien Avoidance and 11 U.S.C. Sec. 522(f) - An Update
Ed Urban and Alex Pinkston
An update to our previous article

In our May, 1996 Newsletter in an article entitled Bankruptcy Judgments and Liens - Revisited With Emphasis on 11 U.S.C. Sec. 522(f), we outlined the aspects of real property law in regard to the troublesome language of 522(f). In that article we cited In Re Love, 42 B.R. 317 (Bankr. E.D.N.C. 1984), which held that there is not complete lien avoidance under 522(f) because a judgment creditor can enforce the lien when the debtor or a dependent ceases using the property as a residence or when ownership ceases.

Because of the holding in the case of In Re McQueen (U.S.D. Ct., Eastern D., Western Div., No. 5: 94-CV-631-BR 1996), there is some doubt about what 522(f) actually means. The facts of In Re McQueen are as follows. The debtors owned their residence which was subject to over $898,000.00 in voluntary liens and over $400,000.00 in involuntary liens, one of which was a judicial lien to BB&T in the amount of $350,000.00 which is the subject of the case. The debtors had no equity in their residence, and they flied a motion to avoid the judgment lien. The motion was denied at a bankruptcy hearing "on the ground that the debtors have no equity in their residence and that an exemption is impaired only to the extent that the debtor has equity in the property." The court, in overruling the bankruptcy court’s decision, held that 522(f) was originally intended to provide a debtor the opportunity to avoid a judicial lien on a residence without regard to the debtor’s monetary interest in that residence; therefore, the debtors should have been allowed to avoid BB&T’s judicial lien in its entirety, as partial avoidance is not in line with the original intent of 522(f).

It should be noted that In Re McQueen construed 11 U.S.C. Sec. 522(f) before that section’s amendment by the Bankruptcy Reform Act of 1994. However, the court noted that the legislative history to the amendment indicated that the intent of former 11 U.S. C. Sec. 522(f) was to be construed as in In Re McQueen. The court noted that the legislative history cited in the October 4, 1994 Congressional Record (which is also reproduced in the annotation to 11 U.S.C. Sec. 522) states that the current version of 522(f) overrules decisions which do not allow complete lien avoidance in such a case. It is noted that (1) In Re McQueen dealt with the issue of whether lack of equity above the amounts of liens prior to BB&T’s judicial lien precluded relief under 522(f) and (2) In Re Love dealt with the effect on use of 522(f) of the debtor or a dependent ceasing to use the property as a residence or own the property. Does an In Re McQueen complete lien voidance survive an In Re Love change of status of the real property?

In sum, what the In Re McQueen court might be saying is that, regardless of the limitations in North Carolina’s homestead exemption law, the debtor can obtain complete lien avoidance under 522(f) regardless of the fact that subsequently, the debtor or a dependent might cease to use the property as a residence or cease to own the property. If a procedurally valid 522(f) order is entered stating that the lien is avoided in its entirety and the order is not appealed, we can rely upon the order. Any timely appeal taken must uphold the order. The bankruptcy docket should contain notation of the order and appeals, etc. Bankruptcy Rule 5003(a). The clerk is required to keep a correct copy of every final judgment or order affecting title to or a lien on real property. Bankruptcy Rule 5003(c).

Incidentally, the U.S. Supreme Court has held that 11 U.S.C. Sec. 522(f) cannot be used unless the debtor possessed the encumbered interest in the property prior to the attachment of the lien. Farrey v. Sanderfoot, 500 U.S. 291, 111 S. Ct. 1825, 114 L. Ed2d 337 (1991).

It would seem that 11 U.S.C. Sec. 522(f) could be made more concise and straight forward if In Re McQueen is correct. 522(f) could have been changed in 1994 to clearly state that an order permanently avoiding and cancelling the lien can be entered. Let us hear from you or your bankruptcy law partners or associates regarding this confusing area.

Corporate Conveyances Execution and Acknowledgement
Chris Burti, Vice President and Legal Counsel

Corporate conveyances in the chain of title of a parcel of land can present complex issues for the title examiner. The purpose of this article is to discuss the requirements for proper execution and acknowledgment of corporate conveyances. The case decisions on this subject impose stricter requirements than in the usual case of principal and agent.

A corporate seal must be affixed to the instrument in order for the entity to effectively convey any interest in real estate. N.C.G.S. 47-71.1 validates any corporate conveyance made prior to January 1, 1991 which is defective because of the omission of the seal but is otherwise valid. N.C.G.S. 47-18.3(b) creates a rebuttable presumption that any recorded corporate conveyance bearing a seal purporting to be a corporate seal setting forth the corporate name " engraved, lithographed, printed, stamped, impressed upon, or otherwise affixed " to the instrument has been executed under lawful authority of the Board of Directors by the proper officers or agents of the corporation. This provision has been strictly construed and an instrument bearing a hand lettered seal has been held not to be entitled to the presumption, Catawba County Horsemen’s Ass’n., Inc. v. Deal, 107 N. C. App. 213, 419 S. E. 2d 185 (1992). It should be noted that this case doesn’t invalidate a hand lettered seal but merely removes the benefit of the statutory presumption. In situations where a small corporation desires to execute a conveyance, the directors and officers are available, the seal is not and time is of the essence a corporate resolution adopting a hand lettered seal as the common seal of the corporation, certifying the corporate officers and authorizing the transaction could be annexed to the instrument and recorded with it.

Additional statutory help for the title examiner is provided by N.C.G.S. 47-18.3(a) effective July 1, 1990, which provides as follows:

Notwithstanding anything to the contrary in the bylaws or articles of incorporation, when it appears on the face of an instrument registered in the office of the register of deeds that the instrument was signed in the ordinary course of business on behalf of a domestic or foreign corporation by its chairman, president, or chief financial officer, and attested or countersigned by another person who is its secretary or an assistant secretary, (or, in the case of a bank, its secretary, assistant secretary, cashier, or assistant cashier ), such an instrument shall be as valid with respect to the rights of innocent third parties as if executed pursuant to authorization from the board of directors, unless the instrument reveals on its face a potential breach of fiduciary obligation. The subsection shall not apply to parties who had actual knowledge of a lack of authority or of a breach of fiduciary obligation.

If the instrument does not appear on its face to breach fiduciary obligation, lack authority or be out of the ordinary course of business of the corporation and the relying party ( i.e. the typical title examiner ) does not have actual knowledge to the contrary, if it contains a seal as defined in N.C.G.S. 47-18-3(b) and is executed by the officers designated in N.C.G.S. 47-18-3(a) and further is acknowledged as provided in N.C.G.S 47-41.01(b), it has the most protection afforded by the statutes and a title examiner should be entitled to rely on the validity of the instrument. It should be noted that N.C.G.S. 55-12-02 is a provision of the N.C. Business Corporation Act that requires proposal of certain transactions by the corporations board of directors with approval of the shareholders. It is unclear whether G.S. 47-18-3(a) covers a transaction governed by G.S. 55-12-02. In addition Catawba County Horsemen’s Assn., Inc., cited above, restates the general law that a deed to a corporate officer raises a presumption against the validity of the deed.

If the statutory form of acknowledgment provided in Sec. 47-41.01(b) is used on a corporate conveyance it contains a certification by a State official, duly authorized to take oaths, (notary public) that the parties executing the instrument have, under oath, declared that they are the proper parties and have been properly authorized to so execute the conveyance. While this is in effect a self serving affidavit a title examiner ought to be able to rely on it none the less.

G.S. 47-41.01 contains a proviso that in essence permits any other form of acknowledgment that includes all of the essential elements necessary to warrant the recording official to accept the instrument for recording. We have not directly discussed the issues of authority and corporate standing due to space limitations but we intend to treat these issues more fully in a future article. However, these issues aside, a corporate conveyance in the chain of title which has been executed in substantial compliance with the requirements discussed above can be relied upon by the title examiner unless there is other actual or record notice of a problem. Instruments in the current transaction should be scrutinized carefully for compliance and proof of authority should be obtained.

More on Mobile Homes - A Recent Case
Alex Pinkston, Legal Assistant

In Young v. Lomax, 470 S.E.2d 80 (N.C. App 1996), the North Carolina Court of Appeals upheld a summary judgment in favor of subdivision lot owner plaintiffs against other lot owners for violation of a protective covenant which prohibited trailers and mobile homes.

In this case, defendant Helms was purchasing two lots from defendant Lomax. Helms placed a structure that he bought from Imperial Homes of Charlotte on one of the lots. As a result, plaintiffs sought a permanent mandatory injuction against the defendants compelling them to remove the structure because it violated the subdivision’s protective covenant against trailers and mobile homes.

The trial court granted summary judgment for plaintiffs, and defendants appealed contending that the term "mobile home" is subject to interpretation.

The Court of Appeals affirmed the lower court’s decision by stating that case law clearly defines the term "mobile home" as "a structure that is designed to be moved, for transport." The fact that a structure is made immobile after it has been installed does not change the fact that the structure is a mobile home.

In the present case, defendant’s structure was delivered by truck, in two sections, each having its own permanent steel chassis with two "I" beams attached to the floor system of the unit and each attached to four axles with two wheels per axle. The court concluded that the structure was a mobile home as a matter of law.

The fact that defendant removed the wheels and axles and placed the structure on concrete blocks which were stacked to create piers did not change the structure’s classification as a mobile home because "rendering a structure immobile after it has been installed does not change the fact that the structure is still a mobile home."

The defendants relied on Angel v. Truitt, 108 N.C. App. 679, 424 S.E.2d 660, where the court concluded that the structure in question was not a mobile home since it had been placed on a foundation and could be moved only in the same manner in which a house built on-site could be moved. The court in Angel determined that the structure was not a mobile home because it was never designed for transport.

Therefore, based on the holding in Young v. Lomax, it seems that once a structure has been designed for transport, it will be classified as a mobile home despite the fact that the features which make it mobile are removed.

Statewide Title’s April 1996 newsletter discussed in detail mobile homes and manufactured housing units.

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