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Issue  240
Published:  10/1/2017

In Re: Ackah COA16-8295 9/5/2017 Notice Insufficient for HOA Foreclosure May Pass Good Title
Chris Burti, Vice President and Senior Legal Counsel

This appeal results from an attempt by a residential property subdivision's Homeowners Association (the "HOA") to foreclose its lien resulting from the lot owner's failure to pay dues. It determines the effect on title to the lot where there was inadequate notice to the lot owner after the public sale ordered by the Clerk of Superior Court to enforce the HOA's lien.

There was reportedly no evidence that the owner received actual notice of the foreclosure hearing which resulted in the sale of her property. Upon motion for relief from the Clerk's order and sale, the superior court ordered that the sale be set aside, restoring title to the respondent based on its conclusion that the notice was inadequate. The high bidder appealed.

A divided panel of the Court of Appeals determined the HOA's notice of the proceeding before the Clerk did not satisfy the requirements of Rule 4 of our Rules of Civil Procedure and concluded that the respondent "was entitled to some form of relief from the Clerk's order which had authorized the public sale of her Property."

However, the Court of Appeals determination that they foreclosure sale buyer was "a good faith purchaser at the judicial sale", N.C.G.S. Section 1-108 prevented the superior court from granting the form of relief of divesting the title of the buyer.

The factual basis and analysis follow. The respondent purchased the property in 2005, financing most of the purchase price with a secured loan. In 2012, she moved to Africa, leasing her home during her absence. She did not inform the HOA of her move but had her mail forwarded to her uncle's home in South Carolina. She subsequently fell behind on her HOA dues and the HOA mailed several delinquency notices addressed to her at the subdivision lot which were forwarded to her uncle.

The HOA commenced foreclosure proceedings and sent certified letters addressed to her at her mother's and uncle's addresses, notifying her of the hearing. These letters were returned "unclaimed" and the HOA then posted the property. The record on appeal revealed that the HOA had an email address for the respondent but did not notify her by email of the proceeding.

The respondent was not represented at the hearing and claims that she never received actual notice of the hearing. The Clerk ordered the property sold, the sale was held, the purchasers were high bidders with a bid of $2,708.52 and the property was subsequently deeded to them subject to the mortgage.

The respondent apparently first learned of the proceeding and the foreclosure sale from her tenant after her tenant received a notice to vacate the property, upon which she filed a Rule 60 motion in superior court seeking relief from order of public sale for her Property. The superior court granted her Rule 60 motion and ordered that the sale set aside and restoring.

The Court of Appeals concluded in the opinion that the superior court was correct in its conclusion that the lot owner was entitled to relief based on the HOA's failure to use "due diligence" to notify her of the proceeding as required by Rule 4 of the North Carolina Rules of Civil Procedure.

We hold that in this case, the HOA did not use "due diligence" as required by Rule 4. Specifically, the HOA had Ms. Ackah's email address. The HOA attempted service by certified mail. The HOA had reason to know that Ms. Ackah was not residing at the Property as the HOA sent those letters to Ms. Ackah's mother and uncle. When the notice letters came back "unclaimed," Rule 4 due diligence required that the HOA at least attempt to notify Ms. Ackah directly through the email address it had for her rather than simply resorting to posting a notice on the Property. See Chen v. Zou, ___ N.C. App. ___, ___, 780 S.E.2d 571, 574 (2015) (due diligence requires emailing to a known email address before resorting to service by publication). And since the HOA failed to comply with Rule 4 in providing notice to Ms. Ackah, Ms. Ackah was entitled to relief from the Clerk's order pursuant to Rule 60.

It seems clear that the Court of Appeals is mandating that when the usual  forms of service fail, a creditor/complainant/petitioner must, in addition, review its records to ascertain if it has an email address and, if so, also attempt to serve notice in that fashion. In light of the ubiquitous practice of requesting email addresses by businesses, this may well have wide spread implications for litigation practices.

However, this opinion has broader implications for real property practitioners when relying upon the file in a civil proceeding that affects the title being examined.  In this opinion the Court of Appeals ruled that the Superior Court erred by granting the owner any form of relief which would affect the purchasers' title.

The Court looked to N.C.G.S. Section 1-108 as a restriction upon the authority of the superior court in this case preventing it from granting any such relief stating:

The plain language of N.C. Gen. Stat. § 1-108 states that a court setting aside an order pursuant to Rule 60 may order relief in the form of restitution, but that the court cannot order any relief which affects the title to property which has been sold to a good faith purchaser pursuant to the order being set aside:
If a judgment is set aside pursuant to Rule 60(b) or (c) of the Rules of Civil Procedure and the judgment or any part thereof has been collected or otherwise enforced, such restitution may be compelled as the court directs. Title to property sold under such judgment to a purchaser in good faith is not thereby affected. . . .N.C. Gen. Stat. § 1-108.
We note that N.C. Gen. Stat. § 1-108 may be unconstitutional as applied if the property owner being divested of her property has not received notice which is at least constitutionally sufficient. Our Supreme Court has held that a statute which allowed for the tax sale of a property without any attempted notice to the taxpayer/owner except by posting and publication was unconstitutional as applied, stating that the process "offends the fundamental concept of due process of law." Henderson County v. Osteen, 292 N.C. 692, 708, 235 S.E.2d 166, 176 (1977) (setting aside a tax sale of taxpayer's property where taxpayer did not receive notice which was constitutionally sufficient).

Here, the Court distinguished the effect of its determination that there was no evidence that the landowner received actual notice or other notice sufficient under Rule 4 from the effect of jurisprudence from the United States Supreme Court, concluding that the attempts by the HOA to notify her were constitutionally sufficient stating:

Specifically, a party need not use "due diligence" under the Constitution, but rather, as the United States Supreme Court held, notice is "constitutionally sufficient if it was reasonably calculated to reach the intended recipient when sent[.]" Jones v. Flowers, 547 U.S. 220, 220 (2006). The Court explained that constitutional "[d]ue process does not require that the property owner receive actual notice[.]" Id. at 226 (emphasis added). For instance, where notice sent by certified mail is returned "unclaimed," due process requires only that the sender must take some reasonable follow-up measure to provide other notice where it is practicable to do so. Id. The Court specifically held that where the owner no longer resides at the property, due process is satisfied if the notice is posted on the front door of the property, as it is reasonable that the owner's tenant would notify the owner of the posting:
[A] reasonable follow up measure[], directed at the possibility that [the owner] had moved as well as that he had simply not retrieved the certified letter, would have been to post notice on the front door, or to address otherwise undeliverable mail to "occupant." . . . Either approach would increase the likelihood that the owner would be notified that [s]he is about to lose [her] property[.] . . . It is [] true in the case of an owner who has moved: Occupants who might disregard a certified mail slip not addressed to them are less likely to ignore posted notice[.] . . . [T]here is a significant chance the occupants will alert the owner, if only because a change in ownership could well affect their own occupancy. Id. at 235.

Since the HOA posted a notice on the front door of the property after the HOA's certified letters were unclaimed, the majority deemed the "HOA's notice constitutionally sufficient under Jones, notwithstanding that the notice did not satisfy the 'due diligence' requirement of Rule 4. We note that the HOA did even more to notify Ms. Ackah than posting the notice on the Property: the HOA sent several letters by regular mail to Ms. Ackah indicating its intent to enforce the lien. Id. at 234 (holding that notice by regular mail is reasonable)."

Since the notice was deemed constitutionally sufficient in this case, the court applied N.C.G.S. Section 1-108, to favor the interests of the high bidder, as a good faith purchaser at a judicial sale. Title examiners will laud such a doctrine as it adds to the certainty of title without requiring them to become accomplished seers as to whether some future court will deem notice sufficient in a particular case.

The opinion noted that N.C.G.S. Section 1-108 does not leave the respondent without a remedy. As N.C.G.S. Section 1-108 allows her to seek restitution from the HOA. The dissent relied on Cary v. Stallings, 97 N.C. App. 484, a 1990 opinion from the Court of Appeals to suggest that a superior court does have the authority to affect the judicial sale buyer's title when it sets aside a Clerk's order. The majority notes that while the North Carolina Supreme Court has not had occasion to address the language in N.C. Gen. Stat. § 1-108 since Stallings, that prior to 1990, the North Carolina Supreme Court stated on a number of occasions that where a court sets aside a judgment, the court may not enter an order which affects the title to property sold under that judgment to a good-faith purchaser, at least so long as the debtor received constitutionally adequate notice of the proceeding, citing and analyzing a line of cases that may well be deemed authoritative.

We can anticipate further attention to this case.

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