December 2000

A PUBLICATION OR THE TITLE COMPANY OF NORTH CAROLINA

     

LOAN PAYOFFS -HOW THE UCC AND A COMPLEX SET OF FACTS CAN MAKE A BIG IMPACT

The case of In The Matter Of: The Foreclosure Of The Deed Of Trust Executed By First Resort Properties Of N.C., Inc. To Samuel H. Poole, Trustee, and Charles Billings and wife, Janice Billings, Beneficiaries, Recorded in Book 362, Page 546, Moore County Registry, 94 N.C. App. 99, 380 S.E. 2d 124, aff'd 326 N.C. 357, 388 S.E. 2d 769 (1990), should be noted.

On February 1, 1984 Petitioners Charles and Janice Billings made two loans to First Resort Properties of N.C., Inc. in the amounts of $59,300.00 and $70,000.00. First Resort gave Petitioners promissory notes in the amounts of $79,300.00 and $90,000.00 respectively for the two loans. The promissory note for $79,300.00 was secured by a deed of trust on a piece of real property located in Moore County, North Carolina known as Unit 109 Foxgreen Villas Condominiums and now known as Unit 309 Foxgreen Villas Condominiums. The $90,000.00 loan was secured by a deed of trust on a piece of real property located in Moore County, North Carolina known as Unit 1 of Foxcroft Villas Condominiums and now known as Unit 235 Foxcroft Villas Condominiums. Both deeds of trust were recorded. Berkeley Federal Savings and Loan Association transferred funds in the amount of $169,300.00 to Mid-South Bank in Sanford and Mid-South Bank issued checks payable to the closing attorney, in the amounts of $79,300.00 and $90,000.00. The front of the $79,300.00 check from Mid-South to the attorney had been annotated by Mid-South Bank 'Payoff of Unit 309'. The front of the $90,000.00 check from Mid-South to the attorney had been annotated 'Payoff of Unit 235. The attorney endorsed both checks payable to First Resort Properties, Inc., the debtor on both notes and deeds of trust. In the presence of the attorney, the two checks were endorsed by John Mitchell, Jr., Vice-President of First Resort Properties, Inc., payable to the order of Charles Billings. Both checks contained the purported signature of Billings. The signature was analyzed by handwriting experts. The parties stipulated that "the Court may find as a fact that said signatures are the signatures of Charles Billings."

The $79,300.00 check and the $90,000.00 check were paid by Mid-South Bank on March 6, 1984. From the proceeds of the checks, Billings received an official check in the amount of $64,300.00 and a deposit was made to the account of First Resort Properties, Inc. in the amount of $105,000.00, both transactions occurring on March 6, 1984, the two amounts totaling $169,300.00. Billings was furnished a copy of the deposit slip showing the deposit of $105,000.00 to the account of First Resort Properties, Inc. at the time he received the official check of $64,300.00. It was stipulated that at all times Charles Billings was acting as agent for his wife Janice Billings with regard to any transaction surrounding this matter. The notes and deeds of trust dated February 1, 1984 were not cancelled.      

The sole issue for the court to determine was whether or not the endorsement of Charles Billings on the $79,300.00 and $90,000.00 checks constituted payment and satisfaction of the notes and deeds of trust dated February 1, 1984. "

Petitioners, the Billings, brought forward three assignments of error. First, that the trial court erred in concluding the notes had been paid in full in that there was no evidence to show the checks or their proceeds were received by petitioners. Second, that the court's conclusion that endorsement of the checks constituted satisfaction of the indebtedness. Finally, petitioners contended that the trial court erred in concluding that the notes were paid in full in that there was insufficient evidence to show the par- ties intended the underlying debt to be satisfied. The petitioners contended that the debts were satisfied only to the extent of $64,300.00 ($32,150.00 per note), the amount of the official check Charles Billings admitted receiving. Respondent contended that Charles Billings' endorsement of the Mid-South checks, payable for the exact amount of the indebtedness and marked on the front as payment for the two condominium loans, evidenced payment in full.

The court found that the checks issued by Mid- South Bank were negotiable instruments within the scope of then existent Article 3 of the UCC, citing G.S. 25-3-104(1) (now G.S. 25-3-104(ať and G.S. 25-3-805 (omitted from the current statute; see Comment 2 to current G.S. 25-3-104).

The court quoted then existent G.S. 25-3-802(1)(a): "Unless otherwise agreed where an instrument is taken for an underlying obligation...the obligation is pro tanto discharged if a bank is drawer, maker or acceptor of the instrument and there is no recourse on the instrument against the underlying obligor." The court stated that if the Mid-South checks were taken to payoff the two promissory notes on the condominiums, the debt on the two promissory notes was discharged pro tanto, to the extent of payment made. The court also quoted existent G.S. 25-3-603(1): "The liability of any party is discharged to the extent of his payment or satisfaction to the holder."

The stipulations showed that Charles Billings signed the backs of the Mid-South checks and received a check for $64,300.00 and a deposit slip showing a $105,000.00 deposit into First Resort Properties, Inc.'s account. The evidence was sufficient to show that Charles Billings was a holder of the checks and that he received payment on the checks. Therefore, there was payment in full of the underlying obligation pursuant to G.S. 25-3-802(1)(a). The underlying debts were discharged and the foreclosure actions were properly dismissed. 

At the Court of Appeals level, there was a dissent on the question of whether the checks were "taken" as full payment of the under lying debt.

It is noted that in 1995, G.S. 25-3-310 replaced G.S. 25-3-802. In lieu of G.S. 25-3-802(1)(a), today G.S. 25-3-310(b)(1) would apply G.S. 25-3-603(1) has been replaced by G.S. 25-3-602. The newer versions of these statutes would not change the outcome of the case.       

The above case is a good example of how title insurance protects a party, in this case, the lender-insured under a title insurance loan policy Obviously, in a complex transaction, the attorney opined that the prior deed of trust indebtedness in each case was satisfied but that the deeds of trust were not cancelled of record. In this case, as in much more simple cases, the title insurer insured the new lender's first lien position without exception to the prior deeds of trust and defended the priority of the insured deed of trust against adversary prior lien holders. It is not unusual at all for a title insurer to insure over such prior deeds of trust on the basis of good evidence of payment even though cancellation has not occurred. However, careful payoff procedures and documentation of the payoff are important.

There are many types of cancellation of deeds of trust in G.S. 45-37. However, perhaps it is time to enact a provision similar to South Carolina Code §29-3-330(e). The statute allows the attorney to utilize an affidavit in the form set forth below which shall act as a notice of satisfaction and release of lien of record when recorded. The language of the form affidavit is set out in the statute as follows:

"STATE OF SOUTH CAROLINA  

COUNTY OF                                     MORTGAGE LIEN
SATISFACTION AFFIDAVIT

PURSUANT TO SECTION 29-3-330

OF SC CODE OF LAWS
FOR BOOK               PAGE              

The undersigned on oath, being first duly sworn, hereby certifies as follows:

         .
1. The undersigned is a licensed attorney admitted to practice in the State of South Carolina.             

2. That with respect to the mortgage given by                       to                      dated               and recorded in the office of the Register of Deeds in book                       at page                                         

a. [ ]  That the undersigned was given written payoff information and made such payoff and is in possession of a cancelled check to the mortgagee, holder of record, or representative servicer                                             

b. [ ]  That the undersigned was given written payoff information and made such payoff by wire transfer or other electronic means to the mortgagee, holder of record, or representative servicer and has confirmation from the undersigned's bank of the transfer to the account provided by the mortgagee, holder of record, or representative servicer.

Under penalties of perjury, I declare that I have examined this affidavit this                  day of              and, to the best of my knowledge and belief, it is true, correct, and complete.""

[The form contains lines for the attorney's signature, bar number, address, phone number and the notary's acknowledgment.]  

It is believed that a new addition to G.S. 45-37 similar to the South Carolina statute (and coordinated with other statutes such as the future advances and equity line statutes) would not only help the position of subsequent purchasers for value and lenders in situations similar to Billings, supra, and Raintree Realty and Construction, Inc. v. Kasey, 116 N.C. App. 340, 447 S.E. 2d 823 (1994) (the noteworthy equity line case where the equity line payoff was $24.34 "short", the equity line balance was not reduced to "zero" and the borrower never made a request to the equity line lender for entry of satisfaction in compliance with G.S. 45-81c)) but would also prevent the problem of the records never indicating cancellation of record of a prior deed of trust in so many situations.

ATTORNEY ACTS AS NOTARY

NationsBank of North Carolina, N.A. v. Parker,             N.C. App.            , 535 S.E. 2d 597 (2000), involved a closing attorney acting as an attorney and notary public.

The defendant attorney closed a loan by the bank to a company (Shamrock) at the request of its president, Walker, for a golf course located on land owned by the Walkers, parents of Walker. A condition of the loan was for the parents to sign a guaranty of the loan. The closing attorney, who was Walker's attorney, notarized the signatures and witnessed others and then disbursed loan proceeds to Walker at the March 25, 1992 closing. Subsequently, Walker died and the Shamrock loan went into default. On June 6, 1997, the bank sued Walker's estate, Shamrock and the parents. The estate and Shamrock defaulted and the parents won on summary judgment because they were able to prove that their signatures on the guaranty were forged. The bank amended its complaint to sue the attorney as an attorney and as a notary under various theories of liability. Regarding liability as a notary, the court cited prior holdings that, "Absent allegations of malice or corruption a 

notary may not be held liable for certain acts within her scope of duties." This rule applies even if the notary is also an attorney. Therefore, there was no liability as a notary public. Since the action against the attorney as an attorney was filed over six years after the transaction closed, the action was deemed barred by the statute of limitations, the court citing G.S. 1-15(c)'s statute of repose pertaining to accrual and the "last act." There was no ongoing attorney - client relationship, the court citing Hargett v. Holland, 337 N.C. 651, 447 S.E. 2d 784 (1994). While the bank's additional claim of constructive fraud was not barred since the ten-year statute of limitations under G.S. 1-56 applied, the court found no constructive fraud since the attorney did not seek to benefit himself.

The obvious lesson of this case is, do not notarize signatures that you have not seen affixed to the documents. Forgetting that lesson subjected the attorney to a complaint of negligence, breach of fiduciary duty, negligence as a notary, legal malpractice, negligent misrepresentation and constructive fraud.

FEDERAL TAX LIENS - FORECLOSURE OF DEED OF TRUST AND SUBORDINATE FEDERAL TAX LIENS

This topic is governed by 26 U.S.C. §7425(b) and (c). The foreclosure sale will be subject to the otherwise inferior federal tax lien if the tax lien is properly filed more than 30 days before the foreclosure sale and the United States is not given notice of sale in writing, by registered or certified mail or by personal service, not less than 25 days prior to the sale.

It must be remembered that when a foreclosure sale is subject to the federal tax lien under the rules discussed above, the federal tax lien is effectively elevated in priority. A federal tax lien which is inferior in priority to a mortgage or deed of trust being foreclosed will be discharged by the foreclosure sale of the mortgage or deed of trust if (1) the federal tax lien is properly filed more than 30 days before the foreclosure sale and the aforesaid written notice is given not less than 25 days prior to the sale or (2) the federal tax lien is not properly filed more than 30 days before the foreclosure sale. 

The notice of sale to be given to the United States is to be in the form prescribed by the regulations and must contain the following information:

(i) The name and address of the person submitting the notice of sale;
(ii) A copy of each Notice of Federal Tax Lien (Form 668) affecting the property to be sold, or the following information as shown on each such Notice of Federal Tax Lien.
(A)      The internal revenue district named thereon.
(B)      The name and address of the taxpayer, and
(C)      The date and place of filing of the notice;
(iii) With respect to the property to be sold, the following information-
(A)      A detailed description, including location, of the property affected by the notice (in the case of real property the street address, city, and State and the legal description contained in the title or deed to the property and, if available, a copy of the abstract of title).
(B)      The date, time, place, and terms of the proposed sale of the property; and
(C)      In the case of a sale of perishable property described in paragraph (c) of this section, a statement of the reasons why the property is believed to be perishable; and
(iv) The approximate amount of the principal obligation, including interest, secured by the lien sought to be enforced and a description of the other expenses (such as legal expenses, selling costs, etc. ) which may be charged against the sale proceeds. See I.R.C. Regs. §301.7425-3(d)(1). 

If the notice of sale is submitted in duplicate to the district director with a written request that receipt of notice be acknowledged and returned to the person giving notice, the district director will honor the request by acknowledgment, indicating the date and time of receipt of the notice. I.R.C. Regs. §301.7425-3(d)(3). The regulations also deal with postponement of sale. See I.R.C. Regs. §301.7425-3(a)(2). 

Notwithstanding the rules discussed above, a foreclosure sale shall discharge an inferior federal tax lien if the United States consents to the sale free of the federal tax lien. 26 U.S.C. §7425(c)(2). The district director of the I.R.S. for the district where the sale occurs is the official who must give the consent. I.R.C. Regs. §301.7425-3(b)(1). The consent is effective only if in writing. The consent is subject to the conditions and limitations required by the district director. The district director may not consent to a sale after the date of the sale. 

The United States has a right to redeem pursuant to 26 U.S.C. §7425(d) under certain circumstances. The redemption period is 120 days from the date of sale or period allowable for redemption under local law, whichever is longer. 26 U.S.C. §7425(d)(1). Many attorneys feel that the expiration of the upset bid period (without an upset bid) should be the commencement of the 120-day period. (That period is 10 days from the filing of the request of sale. G.S. 45-21-27(a).) But in a public sale context, I.R.C. Regs. §301.7425-2(b)(1) seems to allow computation from the date of sale. 

The regulations spell out many of the details of, and limitations on, the right to redeem. See I.R.C. Regs. §301.7425-4. The right of redemption of the United States exists even though the district director has consented to the sale free of the federal tax lien. If the foreclosure sale does not discharge the federal tax lien, the redemption provisions do not apply because the federal tax lien will continue to attach to the property after the sale. If the United States is not entitled to notice of sale, the United States does not have a right to redeem under 26 U.S.C. §7425(d). 

The government apparently recognizes the "purchase money mortgage rule" of priority). See for example, In Re Halprin, 280 E 2d 407 (3rd Cir. 1966). If a federal tax lien is filed against Jones, then Jones acquires title and simultaneously gives a deed of trust to secure the purchase money and the deed and deed of trust are recorded simultaneously, the deed of trust will have priority over the federal tax lien. Therefore, such subordinate liens must be dealt with under 26 U.S.C. §7425(b) and (c).                    

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