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Issue  172
Published:  11/1/2009

Trial Court Sets Aside Foreclosure Sale - Remanded
Chris Burti, Vice President and Senior Legal Counsel

In Re Foreclosure of Barbot, COA09-118, Filed on October 6, 2009

This appeal was filed by third-party purchaser at the foreclosure sale of a homeowner's association lien foreclosure. The appellant appealed the trial court's order setting aside the sale and vacating the foreclosure order of sale. The Court of Appeals vacated the order and remanded the case for additional proceedings.

Hunters Creek Townhouse Homeowners Association, Inc., ("Association") filed a claim of lien against the property in question, alleging that the "non-resident" owners at the time of the sale ("appellees") were delinquent in their Association dues. The Association filed a notice of foreclosure hearing and after the hearing an order authorizing foreclosure was issued. The final report and account filed in the proceeding showed that the property had been sold to the appellant. Apparently, the Association attempted to serve the appellees only at the property's address. The court states that the record showed that the appellees never lived at the property and that their legal address was at a different location.

Subsequently, the appellees filed a motion to set aside the foreclosure sale and to vacate the foreclosure order based on lack of notice. The appellant responded and the trial court vacated the sale and set aside the foreclosure order. On appeal, the bid purchaser contended the trial court erred in setting aside the foreclosure sale and vacating the foreclosure order on two grounds. First, that the appellees failed to offer any evidence to support their motion, and second, that the Appellant was an innocent purchaser for value without notice of any alleged defects in service of the foreclosure notice to the property owners.

The appellees, in turn, moved to dismiss the appeal for lack of standing in the appellant because he was not a party to the action and the Court of Appeals took up that issue first. The appellant contended that he was a necessary party and should have been joined by the appellees in their action to set aside the foreclosure sale. The Court of Appeals agreed that he was a necessary party and that because he was not made a party, the trial court erred in failing to dismiss the motion to set aside the sale and order. Thus, the Court of Appeals vacated the trial court's order and denying the appellees' motion to dismiss.

The Court states that the record "does not indicate that Bartley ever moved for joinder or was properly joined as a necessary party in the action to set aside the foreclosure sale. However, the record does reflect that he was 1) named in the appellees' motion as the person to whom the property had been deeded, 2) served with the motion to dismiss, 3) noticed for the hearing on the motion, 3) allowed to obtain a continuance, the order for which refers to him as a "party in interest," 4) permitted to file an affidavit and a memorandum of law in the matter, and 5) charged with attorney fees and costs related to the continuance he obtained."

In analyzing whether the appellant was a necessary party, the Court of Appeals looked first to the provisions of the North Carolina Rules of Civil Procedure governing the necessary joinder of parties and the opinion sets forth the "pertinent" parts of Rule 19 as follows:

"(a) Necessary joinder. -- Subject to the provisions of Rule 23, those who are united in interest must be joined as plaintiffs or defendants; but if the consent of anyone who should have been joined as plaintiff cannot be obtained he may be made a defendant, the reason therefor being stated in the complaint; provided, however, in all cases of joint contracts, a claim may be asserted against all or any number of the persons making such contracts.

(b) Joinder of parties not united in interest. -- The court may determine any claim before it when it can do so without prejudice to the rights of any party or to the rights of others not before the court; but when a complete determination of such claim cannot be made without the presence of other parties, the court shall order such other parties summoned to appear in the action.

N.C. Gen. Stat. § 1A-1, Rule 19 (2009)."

The court then proceeds with an explication of a series of cases dealing with the issue in the context of efforts parties seeking to have courts set aside deeds. It is sufficient to summarize the line of cases cited make it clear that the grantee of such a conveyance is emphatically a necessary party and the requirement is jurisdictional, meaning any order without the required joinder is null and void. It would have been sufficient for the court to then simply remand the case, however, the opinion goes on to discuss Goodson v. Goodson, 145 N.C. App. 356, 551 S.E.2d 200, (2001).

The Court of Appeals notes that "the Goodsons, who had owned the property at issue and were moving to set aside a judicial sale, had neglected to join as necessary parties the Freemans, who had purchased the property at the judicial sale without any actual or constructive knowledge of infirmity of title, just as Bartley contends he did here. (citation omitted) "In order to declare the deed to [the property] null and void, the trial court needed jurisdiction over all of the current owners of the property, which it did not have." Id. (internal citation omitted). The same situation is presented in this case."

Arguably, Goodson is a bad choice for the court to discuss in the context of this case because the underlying facts are materially different and upon remand could misdirect the trial court toward an error that would give rise to further appeal. It should be noted that "Mr. Goodson filed a motion to set aside the commissioner's deed on Tract C, alleging that he had not received the amended notice of sale…" Id. The Goodson court's opinion concluded that "the sale should be upheld as long as the trial court had proper jurisdiction over the parties and the subject matter". (emphasis added)

The Court of Appeals in Goodson goes on to state: "[I]t is well settled in North Carolina that, in the absence of fraud or the knowledge of fraud, one who purchases at a judicial sale, or who purchased from one who purchased at such sale, is required only to look to the proceeding to see if the court had jurisdiction of the parties and of the subject matter of the proceeding, and that the judgment on its face authorized the sale." Cherry v. Woolard, 244 N.C. 603, 610, 94 S.E.2d 562, 566 (1956) (holding the purchaser at a judicial sale acquired good title, despite contentions of defective service to minor defendants).

This language in Goodson and the quoted text from Cherry, could lead the trial court to suppose that the Court of Appeals might be suggesting (sans emphasis) the outcome of the remand hearing in light of the following discourse by this panel of the Court of Appeals.

"Bartley, record owner of the property who purchased it without notice of infirmity of title at a judicial sale, is a necessary party in the appellees' motion to set aside the foreclosure sale.

When both the appellees and Bartley failed to move to join Bartley as a necessary party, the trial court should have intervened ex mero motu to ensure his joinder. The trial court having failed to do so, its order setting aside the sale is null and void."

It is very important to note that this case is discussing the failure to serve notice of sale which is a procedural defect having nothing to do with jurisdiction. However, the failure to properly serve an owner with summons for the proceeding is jurisdictional and the resulting deed will not divest title and only serves as color of title for constructive adverse possession, see Amis v. Stephens, 111 N.C. 172, 16 S.E. 17 (1892), First-Citizens Bank & Trust Co. v. Parker, 235 N.C. 326, 69 S.E.2d 841 (1952) and Scott Poultry Co. v. Bryan Oil Co., 272 N.C. 16, 157 S.E.2d 693 (1963). If the notice in the case is insufficient to establish jurisdiction for the foreclosure sale order as suggested by the facts as set out by the court in its summary of the record on appeal, then that order is void ab initio and the sale and deed must be set aside irrespective of the lack of knowledge of the bidder. See: Jenkins v. Richmond County, 99 N.C. App. 717, 394 S.E.2d 258 (1990) and Commissioners of Roxboro v. Bumpass, 233 N.C. 190, 63 S.E.2d 144, (1951).

It is supposed that the trial court will be provided with the facts needed to make the proper findings and will draw the proper conclusions rather than be misdirected by the implications in the citation to Goodson.

Dirt Tales From the Deed Vault - Episode 31
John Dillard, Vice President and Legal Counsel

Julius Crane was ready to move into the new house he and his wife, Katrina had just finished building in Sleepy Hollow Estates. The moving company, Van Tassel Movers, delivered their furnishings and the Cranes had just finished arranging everything and were about to settle in and begin enjoying their new home when they heard a knock on their door. A sheriff's deputy delivered a set of papers to the Cranes without explaining what they were. Julius decided he would take them to his attorney the following morning.

The law firm of Washington and Irving had handled the closing for Julius and his wife when they bought their lot the previous year. Attorney Charles Ichabod looked the papers over and declared that one of the subcontractors that had worked on the construction of the Crane's home had not been paid and was filing a claim of lien. He then pulled their file and extracted a lien waiver form that was signed by the general contractor and a number of other subcontractors who had worked on the construction. The subcontractor who was filing the claim of lien had not signed the form.

Attorney Ichabod explained that under North Carolina law a contractor performing work had 120 days from the last time they furnished labor or materials to file their lien and that although efforts had been made to identify and obtain the signatures of all the contractors who had worked on the Crane's home often someone was missed. There was some good news, he explained. Since the main contractor had not been the owner of the lot then his signature on the lien waiver, which was obtained before the subcontractor filed their lien, would prevent that subcontractor's lien from attaching to the Crane's property.

North Carolina has now standardized lien waiver forms, Form 1, Form 2 and Form 3. Form 1 is used in normal buy and sell transactions were no major improvements to the dwelling have been made. Form 2 is to be used for recently completed construction and Form 3 is used with ongoing construction. The forms are copyrighted and may not be amended without the approval of the title company. Where it is necessary to obtain the signatures of subcontractors the attorney must rely on another source for the names of those contractors and often one or more may be overlooked. As we saw in the situation with the Cranes, in general as long as the contractor and owner are separate, the contractor's execution of a waiver of lien rights will limit the subcontractor's claim to a claim on funds owed the general contractor.

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