In a recent decision the Bankruptcy Court has held that a tax foreclosure sale without competitive bidding is not entitled to the presumption, under the rule created by the Supreme Court in BFP v. Resolution Trust Corp., 511 U.S. 531, 549 (1994), to have received reasonably equivalent value, Sherman v. P.J. Rose, 223 B.R. 555 (Bankr. 10th Cir.). BFP states that the foreclosure sale price is the reasonably equivalent value, and therefor not a preference, in the case of a mortgage foreclosure sale that complies with state law.

The tax foreclosure sale in this case complied with Wyoming law. Nonetheless, the bankruptcy court voided the sale under 11 U.S.C. § 548 for having failed to obtain the reasonably equivalent value of the property which sold for $450 although worth between $10,000 and $50,000.

The bankruptcy court pointed out that the U.S. Supreme Court specifically limited its holding in BFP to mortgage foreclosures. In a footnote to the BFP opinion the Court stated that tax foreclosures might involve different issues and further observed that decisions since BFP have upheld its application. The bankruptcy court found that the BFP holding should not apply to the special circumstances of the Wyoming tax foreclosure rejecting a strict application of BFP to tax foreclosure sales.

A Wyoming tax foreclosure involves no competitive bidding. Instead the property is sold for the amount of back taxes to a party selected from a public lottery. Although the procedure is effective in collecting back taxes, there is absolutely no argument that it secures fair value for the property.

This case presents a significant implication for title examiners. All tax foreclosures less than seven years old must be reported on a title insurance application. If the commissioner’s deed is in proper form, properly executed, acknowledged, recorded and indexed it might be presumed to be valid after seven years based upon color of title decisions. If the sale is more than one year old the examiner should inspect the foreclosure records to confirm that proper notice was served on all necessary parties. These would include owners, mortgagees and judgment creditors, see NCGS Sec. 105-374 and NCGS Sec. 105-375. If the sale is less than one year old the file must be analyzed for adequate value under the rules in effect prior to BFP.

There may be additional tax foreclosure concerns for the real property practitioner under North Carolina law. It should be noted that the provisions of NCGS Sec. 105-374(d) are often overlooked. This section is set forth as follows: "Complaint as Lis Pendens. --The complaint in an action brought under this section shall, from the time it is filed in the office of the clerk of superior court, serve as notice of the pendency of the foreclosure action, and every person whose interest in the real property is subsequently acquired or whose interest therein is subsequently registered or recorded shall be bound by all proceedings taken in the foreclosure action after the filing of the complaint in the same manner as if those persons had been made parties to the action. It shall not be necessary to have the complaint cross-indexed as a notice of action pending to have the effect prescribed by this subsection (d)." This is largely an academic concern since these proceedings are usually indexed in the Special Proceedings Index and most taxing authorities will advise of the costs, including attorney fees, upon inquiry of the outstanding taxes. But, NCGS Sec. 105-174(a) provides "General Nature of Action.--The foreclosure action authorized by this section shall be instituted in the appropriate division of the General Court of Justice in the county in which the real property is situated and shall be an action in the nature of an action to foreclose a mortgage." Conceivably with this non-specific language an action could be filed as a civil action. If the taxing unit only reports the taxes owed on a parcel in such a pending foreclosure to the examiner and only that amount is paid at closing it will probably be insufficient to redeem the property. One can readily envision a situation where the timing could fall into this critical period near the end of the foreclosure proceeding resulting in a complete divesture of title.

Many attorneys consider the examination of civil action indices not to be the standard of practice for title examinations in this State. This is understandable since the North Carolina Bar Association standard form of opinion includes standard exception number 8 which excepts "Civil actions where no notice of lis pendens against subject property appears of record." Coupled with the recent changes in fraudulent conveyance statutes, the provisions of NCGS Sec. 105-374(d) suggest a reevaluation of the standards of practice for this aspect of title examination.

In the process of issuing final title policies we frequently come across errors in the filling out of deed of trust forms. The FNMA form contains the following language: " This debt is evidenced by Borrower’s note dated the same date as this Security Instrument … ." The two most difficult errors to deal with are the omission of the date on the deed of trust and different parties executing the note and the deed of trust. An example of the latter most frequently occurs when one spouse is the borrower on the note and the other is required to execute the deed of trust. Our ability to deal with these two issues from an insurance perspective is governed by case law. Foreclosure of Deed of Trust of Enderle, 110 N.C.App. 771, 431 S.E.2d. 549, (1993), and Putnam v. Ferguson, N.C.App. , 502 S.E.2d. 386, (1998), address the issue of the misidentified note maker and are the leading cases we rely upon.

Putnam is the most recent case and relies on Enderle. In Putnam property was conveyed to Greg Ferguson, Trustee for Leslie and Marilyn Ferguson. The Fergusons executed a purchase money note and the Trustee executed the Deed of Trust. It is probable that a printed form was used. The Putnam court states; " the deed of trust identifies Greg Ferguson as the debtor, while the promissory note is from Leslie and Marilyn Ferguson. As in Enderle, the deed of trust "did not properly 'identify the obligation secured.' " Id. Accordingly, the deed of trust is invalid. Since the deed of trust is invalid, plaintiff [mortgagee] does not have a valid lien." Enderle also dealt with the issue of whether a deed of trust is invalidated by failure of consideration when the grantor is not indebted to the beneficiary. Citing 55 Am.Jur.2d Mortgages § 146 (1971) the Enderle court opines; "[m]ortgages may be executed to secure the obligations of third persons" and "[a]n undertaking ... to be personally responsible for the payment of the debt of the third person is not essential to the validity".

While the cases do not address the consequences of a missing date, a date is not, of itself, essential to the validity of a deed of trust. If the deed of trust contains a blank for the date of the note that is correctly filled in, the lack of a date of the deed of trust itself does not affect its validity. However, when a form containing language similar to that quoted above is used, it becomes an Enderle problem because the note is misidentified. If the deed of trust was intended to be dated the same as the date of acknowledgment a NCGS Sec. 47-36.1 re-recording may be sufficient to correct the problem of a missing date.

With respect to the misnomer issue we point out that the Putnam court states; "there was no reference [emphasis added] to the Leslie and Marilyn Ferguson note in the deed of trust." While many lenders will not permit any modification of the language in the deed of trust, it would seem that the correct note information could be included in the space provided for the description and thereby "reference" the note. After recording it probably would not be a "minor typographical error" to include such information and, therefor, would require re-acknowledgment, re-recording and title update to correct.

(Editor’s note: This article was prepared for our Newsletter by Rick Barnes, one of our client attorneys from Barrister Legal Services in Raleigh. We thought it might be a good time to share his adventure as many of us turn our thoughts to planning that perfect vacation away from clients, the telephone, fax machine, late closing packages…! Let us know if you have experienced a vacation that made you wonder if you would have been better off staying at the office.)

Mr. Chris Burti
Statewide Title, Inc.
110 Arlington Blvd.
Greenville, NC 27858

RE: Vacations

Dear Chris:

Following your advice, Susan and I decided to take some time off for a vacation and chose a cruise on the Royal Caribbean’s "Monarch of the Seas". Little did we know that Royal Caribbean’s slogan, "Like no vacation on earth" would take on such a new meaning.

We boarded our plane at 6:30am, Sunday December 13. We attempted to stop all closings prior to Wednesday, but our clients scheduled 4 closings on Thursday causing us to work until midnight every night prior to leaving. With approximately 4 hours sleep, we boarded our flight to our first cruise and my first vacation ever. At 44 years of age, I guess it was about time. After several hours of travel, baggage checks, and boarding procedures, we began our vacation.

On the first evening prior to setting sail there is a mandatory life boat drill. After sounding the distress call on the ship’s horn and intercom, every passenger is required to meet at their life boat station outfitted with their life jacket. Once completed, the ship sets sail for it’s first stop, in our case, St. Thomas. Susan was in heaven since St. Thomas is a shopper’s paradise. Actually, it was not bad. The store owners ask if you would like a complimentary cold beer while shopping. If local shopping centers would adopt this custom, men would like to go shopping more often.

At about 6:00pm on Monday we left St. Thomas for Martinique. On the first evening, the Captain had a welcome aboard formal cocktail party and dinner. At the cocktail party, the First Mate told us that the Captain sent his regrets but, due to a medical emergency his presence was required on the bridge and we would stop in St. Maarten to allow the passenger, whom we found out later had suffered a heart attack, to be taken to a local hospital. However, we should still be in Martinique as planned in the morning. Like the main male character in Speed 2, I attended the formal cocktail party in a tux and tennis shoes, having failed, in my haste to pack, to pack my dress shoes. Later in the evening, after changing into something more befitting my shoe attire, we visited the casino. At approximately 1:00am, we decided to retire. Finally, I began to relax.

About 30 minutes later, Susan pinched me and said "the ship has hit a reef we are taking on water and we had to abandon ship!". I said "good try, but I’m not going to fall for her trick" and went back to sleep. Again Sue pinched me and said "this is not a trick and listen to the Captain and the distress call". Again I told her "it was a good trick but how did she get the Captain to join in?" Well, at 2:00am Tuesday morning we were at our life boat stations wearing our life jackets as we had the evening before, but this time it was not a drill.

The Captain informed us that he was steering the ship into shallow water, beaching her so that she would not sink. After the ship came to rest in the sand, most of the lifeboats were dropped into place, but it was apparent that several of them were not functioning properly. We were spared the lifeboat trip, though. In St. Maarten, they have small boats called "Tenders" which act as taxis or ferries and were used to remove us to the pier area. Again, for those who saw Speed 2, this was the same pier and the same town that the ship ran aground. This scene was movie magic since we discovered earlier that evening that a ship of that size cannot that close to the shoreline. Here are 2,557 passengers plus the crew, standing on the docks in St. Maarten at 3:00am until about 8:00am, when we were taxied to the French side of St. Maarten and given hotel accommodations. Susan told me that it was my luck that got us a cruise on the HMS Titanic but her luck got us stranded on a topless beach and I should stop complaining. We spent the next several days trying to return to Raleigh, having to spend 2 days in Miami. To finish off our trip, our flight was delayed 2 hours because someone ran through the airport with a gun trying to hijack a plane. We got home 12:00 midnight, Friday.

Believe it or not, we are going to try it again in February. Does anyone want to join us?

Sincerely,
Rick