In re: Nicor, LLC (18-1071) 8/6/19 Foreclosure When Debt Previously Reduced to Judgment
Chris Burti, Vice President and Senior Legal Council

The respondents-appellants in the foreclosure proceedings that gave rise to this appeal ("Obligors") appealed from orders of sale permitting foreclosure of real property securing the deed of trust in dispute. Prior to commencing foreclosure proceedings the holder of the notes, filed Obligors' confession of judgment for the entire outstanding amount owed on the promissory notes securing the deeds of trust. The trial court entered judgment in the holder's favor and stayed the foreclosure proceedings. Obligors argued in the trial court and in the Court of Appeals that the entry of judgment for the aggregate debt secured by the deeds of trust on the property precluded the holder from subsequently foreclosing on the properties. The Court of Appeals held that due to the limited scope of N.C.G.S. Chapter 45 foreclosure proceedings, that this argument was not properly before the trial court and affirmed the trial court's orders of sale permitting foreclosure.

Obligors defaulted on notes totaling over $2,000,000 that had been assigned to the holder herein and the parties entered into a forbearance agreement, which extended the debts, acknowledged the amount of the debt owed and the existence of defaults. The holder agreed not to exercise its rights for a fixed period of time or Obligors' default of the forbearance agreement. Obligors, in turn, executed an entry of judgment if they defaulted under the forbearance agreement. This was subsequently modified and extended again with confession of judgment and foreclosure provisions that were identical to those contained in the first forbearance agreement.

Obligors subsequently failed to comply with the terms of the modified forbearance agreement, the holder filed the confession of judgment and the clerk of court entered judgment against Obligors. Subsequently the holder began power-of-sale foreclosure proceedings and then assigned the notes to the current holder of the notes. The assistant clerk of superior court consolidated the matters for hearing, concluded that the statutory requirements were satisfied and entered an order of sale in each proceeding.

Obligors appealed, and the matters were consolidated for a de novo hearing in Superior Court where the trial court also concluded that the statutory requirements were satisfied and entered orders of sale permitting foreclosure, whereupon Obligors timely filed notices of appeal. In this appeal, Obligors argued that the trial court should not have permitted the foreclosures to proceed since the noteholder had already obtained a judgment against them for the entire amount of the debt secured by the deeds of trust. The Court of Appeals disagreed with this contention and affirmed the trial court.

The Court of Appeals opinion discusses that there are two forms of foreclosure proceedings in North Carolina, foreclosure by judicial action, and foreclosure under power of sale and in discussion the latter observes one of the facts that the Clerk (or Superior Court judge on de novo review) must find is that there is valid debt of which the party seeking to foreclose is the holder.

Obligors first argued that the entry of judgment against them for the full amount of the debt precluded the holder from then proceeding with foreclosure because doing so would in effect repeal the antideficiency statute. The Court quite correctly noted that the mortgages in this case do not fall within N.C.G.S. Section 45-21.38's protections because they are not purchase-money mortgages. The Obligors urged the Court of Appeals to extend the protections of the statute to the same breadth as our Supreme Court has done with purchase money mortgages. The Court does not have the authority to do so as we will discuss later and fortunately declined to do so construing this as an equitable argument and in a well-reasoned discussion deemed the argument outside of the purview of the Superior Court authority and thus, this appellate review as well.

The opinion thereafter goes off the rails a bit in noting that: "although the trial court determined that 'the filing of the Confession of Judgment does not preclude foreclosure,' the trial court did not have the authority to make this conclusion. Accordingly, the trial court's order of sale permitting foreclosure of the properties at issue must be affirmed, sans the conclusion that the previously filed judgment does not preclude foreclosure." and goes on to say:

In a subsequent hearing to enjoin the power-of-sale foreclosure pursuant to N.C. Gen. Stat. § 45-21.34, Obligors may assert that entering judgment against a debtor precludes a creditor from subsequently seeking to foreclose. If Obligors are unsuccessful in enjoining the foreclosure on equitable grounds pursuant to N.C. Gen. Stat. § 45-21.34, they may appeal that order to this Court and make their arguments again. See Goad v. Chase Home Fin. LLC , 208 N.C. App. 259, 704 S.E.2d 1 (2010) (reviewing the denial of an order to enjoin a foreclosure pursuant to N.C. Gen. Stat. § 45-21.34).

The Court of Appeals may have unnecessarily caused this litigation to continue because the trial court could have been deemed to have made a legal conclusion within its authority rather than an equitable one as deemed by the Court of Appeals.

In Bank v. Whitehurst, 203 N.C. 302, (1932), the North Carolina Supreme Court said: "Generally speaking, a creditor-mortgagee such as plaintiff has an election of remedies. Upon default, it may sue to collect on the unpaid note or foreclose on the land used to secure the debt, or both, until it collects the amount of debt outstanding." (emphasis added) This opinion was quoted in G.E. Capital Mortgage v. Neely, 135 N.C. App. 187, (1999) on the issue of a judgment for an erroneously cancelled note. The court held that the judgment on the debt was valid and that the DOT could be reinstated and implicitly enforced.

Thus it appears that the North Carolina Supreme Court has spoken authoritatively and conclusively on the question rendering the trial court's conclusion one of law. The cases indicate that the judgment does not extinguish the debt. As long as the debt remains unsatisfied, the deed of trust may be foreclosed. Underwood v. Otwell, 269 N.C. 57, (1967) is a case with an explicit holding to this effect. "'A creditor whose debt is secured by way of mortgage or trust has two remedies - one in personam, for his debt; the other in rem, to subject the mortgaged property to its payment; and a resort to one is no waiver of the other.' Silvey v. Axley, 118 N.C. 959, 963, 23 S.E. 933, 934. The creditor may combine the two remedies in one civil action. G.S. 1-123; Credle v. Ayers, 126 N.C. 11, 35 S.E. 128; 1 McIntosh, North Carolina Practice and Procedure § 1166 (2d Ed. 1956)."

It would seem that these case are dispositive of the appeal.