April 2005

A PUBLICATION OR THE TITLE COMPANY OF NORTH CAROLINA

     

April 2005   

 

 

NEWSLETTERS – SOME SCANNING PROBLEMS

 

The hard copy newsletters from 1998 through November 2002 were scanned to place them on our website at www.oldrepublictitle.com/nc. The hard copy of each newsletter was reviewed many times to make sure that errors were non-existent. However, for those newsletters that were scanned, we have noticed some errors in the scanned product resulting from the scanning process.  We will be reviewing this and correcting them as time permits. Our offices should have a supply of the old hard copies if you run across a scanned version with an error. The newsletters beginning in December 2002 were electronically transmitted to the home office which installs them on the website, as they were written.

 

BANKRUPTCY – CONSTRUCTIVE NOTICE OF PROCEEDINGS, SEC.549(c) AND S.256.

 

As to interests having priority only as of recording, North Carolina is a “pure race” priority state. That means that the first to record wins. See G.S. 47-18; G.S. 47-20; Bourne v. Lay & Co., 264 N.C. 33, 140 S.E. 2d 769 (1965). 11 U.S.C. § 549 governs post-petition transfers. These transfers are voidable under 11 U.S.C. § 549(a) if the proceeding to avoid is commenced within the time period in 11 U.S.C. § 549(d). However, 11 U.S.C. § 549(c) provides limited protection. We will discuss 11 U.S.C. § 549 and other bankruptcy provisions, S. 256, entitled “Bankruptcy Abuse Prevention and Consumer Protection Act,” and In re McConville. S. 256, passed by the senate, will probably become law in the near future, since on April 14, 2005, the House passed the bill and the President is expected to sign it.

 

11 U.S.C. § 549(c) presently states that:

 

The trustee may not avoid under subsection (a) of this section a transfer of real property to a good faith purchaser without knowledge of the commencement of the case and for present fair equivalent value unless a copy or notice of the petition was filed, where a transfer of such real property may be recorded to perfect such transfer, before such transfer is so perfected that a bona fide purchaser of such property, against whom applicable law permits such transfer to be perfected, could not acquire an interest that is superior to the interest of such food faith purchaser. A good faith purchaser without knowledge of the commencement of the case and for less than present fair equivalent value has a lien on the property transferred to the extent of the present value given, unless a copy or notice of the petition was so filed before such transfer was so perfected. (Emphasis added.)

 

11 U.S.C. § 101(43) states that:

 

“Purchaser” means transferee of a voluntary transfer, and includes immediate or mediate transferee of such a transferee;

 

11 U.S.C. § 101(54) states that:

 

“Transfer” means every mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with property or with an interest in property, including retention of title as a security interest and foreclosure of the debtor’s equity of redemption;

 

It should be noted that “purchaser,” as defined in 11 U.S.C. § 101(43), includes a transferee of any voluntary transfer. “Transfer,” as defined in 11 U.S.C. § 101(54), includes a “conditional” “voluntary” disposing of or parting with property or with an interest in property. Therefore, these two definitions would seem to include the giving of a deed of trust. However, 11 U.S.C. § 549(c) refers to a “transfer of real property,” which is within 11 U.S.C. § 101(54)’s definition, but does not also refer to a transfer of an “interest in property”, as does 11 U.S.C. § 101(54). If one argues that 11 U.S.C. § 549(c)’s reference to “transfer of real property” does not include “transfer of an interest in real property,” the argument must be based upon the premise that 11 U.S.C. § 549(c), while using the term “transfer” broadly defined in 11 U.S.C. § 101(54), limits the meaning of the otherwise broadly defined term “transfer” by referring to “transfer of real property” but not referring to “transfer of an interest in real property.” While this line of reasoning might hold up when an easement is given (an easement is not real property per se, but is an interest in real property), it does not hold up when a deed of trust is given, since, when a deed of trust is given, real property title is transferred conditionally. North Carolina is a “title theory state.” In a deed of trust, there is a conveyance of fee simple title on condition that the conveyance is to be void if the conditions of the loan are satisfied. Gregg v. Williamson, 246 N.C. 356, 98 S.E. 2d 481 (1957).

 

However, the supposed deference to the state real property recording acts as envisioned by 11 U.S.C. § 549(c) was undermined by the decision of the Ninth Circuit in In re McConville, 110 F. 3d 47_(9th Cir.1996), cert denied, 118 S. Ct. 412, 139 L.Ed 2d 315(1997), 77 W.L. 136529 (9th Cir. 1997) (decided March 26, 1997 and withdrawing prior decisions reported at 84 F.3d 340 (9th Cir. 1996) and at 97 F.3d 316 (9th Cir. 1996)). In McConville, a purchase-money lender, without knowledge that the debtor had recently filed an undisclosed chapter 11 case, disbursed money which funded the debtor’s acquisition of real property, and simultaneously recorded its purchase-money deed of trust. On these facts, the Ninth Circuit failed to apply 11 U.S.C. § 549(c). The court limited the application of 11 U.S.C. § 549(c) to transfers of fee interests only.  The court held that a bona fide encumbrancer for value was not within the protection afforded by 11 U.S.C. § 549(c). In its last decision, the court applied 11 U.S.C. § 364 and found it breached. The court remanded with direction to modify to give the lenders a limited lien, which the trustee paid. (11 U.S.C. § 364 is entitled, “obtaining credit.” 11 U.S.C. § 364(d) allows the obtaining of credit secured by a lien.)

 

The problems caused by McConville are solved by amendments to clarify the law. 11 U.S.C. § 362(b), pertaining to the automatic stay, should be amended to clarify that postpetition transfers required to be perfected under 11 U.S.C. § 549(c) and which are otherwise immune from voidability under 11 U.S.C. § 549 would not be void or violable due to violation of the automatic stay. See § 311 of S.256. Also, 11 U.S.C. § 549(c) should be clarified to include “transfers of an interest in” real property, where the purchaser has given fair equivalent value without notice of the pendency of the bankruptcy case and has perfected that interest. Sec § 1214 of S.256. To clarify that 11 U.S.C. § 549(c) of the Bankruptcy Code applies to encumbrancers, the definition of “transfer” in section 11 U.S.C. § 101(54) should be amended by inserting “the creation of a lien.” See § 1201 of S.256.

 

It is noted that even if the transaction is avoidable under 11 U.S.C. § 549, 11 U.S.C. § 550 must be consulted to see when the property can be recovered. The property transferred can be recovered from the initial transferee. 11 U.S.C. § 550(a)(I). It can be recovered from any “immediate or mediate transferee of such initial transferee.” 11 U.S.C. § 550(a)(2). However, there is some protection in 11 U.S.C. § 550. 11. U.S.C. § 550(b) provides that:

 

The trustee may not recover under section (a)(2) of this section from—

(1)     a transferee that takes for value, including satisfaction or securing of a present or antecedent debt, in good faith, and without knowledge of the voidability of the transfer avoided; or

(2)     any immediate or mediate good faith transferee of such transferee.

 

11 U.S.C. § 550(f) states that:

 

        An action or proceeding under this section may not be commended after the earlier of—

(1)     one year after the avoidance of the transfer on account of which recovery under this section is sought; or

(2)     the time the case is closed or dismissed.

 

ADVALOREM TAXES – EXEMPT PROPERTY AND CHANGE OF STATUS

 

Each year the governing bodies are required to levy rates of advalorem taxes on property. This is referred to as the “tax assessment”. The tax assessment is established by adoption of a budget ordinance not later than July 1. G.S. 105-347; G.S. 159-13(a). Taxes are assessed on a fiscal year basis, which begins July 1 and ends June 30. G.S. 159-8(b). (This is significant for tax proration. Often, the parties will prorate taxes on a calendar year basis. Technically, the proration should be on a fiscal year basis. Proration clauses in real estate contracts should specifically provide that the proration is to be on a calendar year basis, if that is the intent.)

 

N.C.G.S. Chapter 105 lists many exemptions from real property tax, including real property used for scientific, charitable, educational and religious purposes.

 

G.S. 105-285(d) governs sale of exempt property to, for example, a non-exempt entity.  EXAMPLE: If title to real property is acquired by the grantee after January 1, 2004, but prior to July 1, 2004 and the real property was not subject to tax on January 1, 2004 on account of its exempt status, it shall be listed by the grantee and it will be taxed for the fiscal year beginning on July 1, 2004. (This means 2004 taxes for July 1, 2004 through June 30, 2005.) (If the grantee acquires title on or after July 1, 2004, the property does not lose its exempt status for 2004 taxes.)

 

POWERS OF ATTORNEY – MORE ON ESTATE OF GRAHAM V. MORRISON

 

In our December 2004 newsletter, we composed an article entitled, Powers of Attorney and Gifts of Real Property – Including Some Insights You Won’t Read Elsewhere. This article discussed the case of Estate of Graham v. Morrison, 156 N.C. App. 154, 576 S.E. 2d 355 (2003), discussing gifts by attorneys in fact. Subsequent to the submission of that article, the Court of Appeals once again considered the case after remanding the case to the trial court for trial court determination of whether the deeds were gifts or conveyances supported by valuable consideration. See Estate of Graham v. Morrison, _N.C. App._, 607 S.E. 2d 295 (2005). The earlier ruling by the Court of Appeals determined that the power of attorney did not give the attorney-in-fact the power to make gifts. The Court of Appeals stated that the court had not previously had a case involving conveyances by an attorney-in-fact where it had to rule what constitutes valuable consideration. The court stated:

 

Thus, we hold that in situations where an attorney-in-fact conveys the principal’s property to herself based upon a consideration of alleged services rendered to the principal, the valuable consideration must reflect a fair and reasonable price when compared to the fair market value of the property. See Morehead v. Harris, 262 N.C. 330, 338, 137 S.E.2d 174, 182 (1964) (stating “[v]aluable consideration or ‘value’ is a fair consideration, not necessarily up to full value, but a price paid which would not cause surprise”), and Hodges v. Wilson, 165 NC. 323, 332, 81 S.E. 340, 345 (1914) (citation omitted) (indicating valuable consideration is “a fair consideration, not up to the full price, but a price paid which would not cause surprise or make any one exclaim, ‘He got the property for nothing; there muse have been some fraud or contrivance about it’”).

 

As a result of applying that test to the facts, (1) the deed by the attorney-in-fact to herself should be voided; (2) the deed by the attorney-in-fact to her son should be voided and (3) the lower court correctly denied the plantiff’s motion for a judgement notwithstanding the verdict on the conversion claim based upon the sale of the third property to John Hallman. A deed of trust placed on one of the properties “must be set aside.” Therefore the Court of Appeals affirmed in part and remanded in part.

 

PENDING BILLS – WATCH LIST

 

Set forth below is a list of bills we are following:

 

Amend Interest Rate Laws (S 903): This bill was referred to Rules.

 

Enforcement of Power of Attorney: This has been referred to Judiciary I. New G.S. 32A-35(a) states that a third party is entitled to assume the power of attorney is valid. Proposed G.S. 32A-35(b) and other sections encourage third parties to accept power of attorney where there is no indication of fraud.

 

Foreclosure Notice of Sale/Disp. Of Proceeds (S 809)(H877): This would require notices of sale to include language that the sale could be delayed by one hour and provides for payment in order of priority of mortgages from proceeds of sale. The Senate bill was referred to Judiciary II. The House bill was referred to Judiciary IV.

 

NC Lien Law Revised (S 887): This is a comprehensive revision of our mechanics’ and materialmen’s lien laws. This bill was referred to Judiciary II.

 

North Carolina Uniform Trust Code (S 679): This will revise the law of trusts in North Carolina.

 

Notary Public Act (S 934): This bill would replace the current chapter pertaining to notaries. The bill was referred to Judiciary II.

 

Order of Payment – ED (H 804): This adds equitable distribution as the seventh class of payment under North Carolina law on order of payments. This bill was referred to Judiciary I.

 

Partition of Sales of Real Property (S 963): This would allow for the sale of property held by co-tenants in lieu of sale by partition. This bill was referred to Judiciary II. It is not receiving support from the real estate community.

 

Personal Representative/Selling Real Property (S 917): This authorizes the P.R. to handle real property without a court order if the will allows with conditions. The bill was referred to Judiciary I.

 

Property Tax Exclusion – Disabled Vets (H 816): This excludes honorably discharged veterans and their surviving spouses from paying property taxes. It reimburses the local governments for their loss. This bill was referred to Finance.

 

Real Estate Trust Monies (S 895): This bill states that real estate brokers can not commingle personal funds with those held in escrow for a real estate transaction. The bill was referred to Commerce.

 

Real Property Electronic Recording (S 671; H 762): This has been referred to Judiciary Committee.

 

Satisfaction of Mortgages and Deed of Trust (S 734): This is a comprehensive bill to amend the procedures for satisfaction or cancellation of mortgages and deeds of trust. This bill was referred to Judiciary I.

 

 

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