February 2002

A PUBLICATION OR THE TITLE COMPANY OF NORTH CAROLINA

     

PRESIDENT'S MESSAGE – NORTH CAROLINA LAND TITLE ASSOCIATION (NCLTA) TO PROPOSE LEGISLATIVE AGENDA 

I would like to note that the NCLTA has developed a legislative agenda. Ed Urban, Sr. Vice President and State Counsel of our company joined our company in March, 1999. He also serves as NCLTA General Counsel and Chairman of its legislative committee at the request of the NCLTA’s President. The NCLTA will be drafting legislative recommendations for the Real Property Section of the North Carolina Bar Association to consider and hopefully support.

Regarding House Bill 716 pertaining to clarifying Chapter 28A as it pertains to a personal representative's power to sell, particularly without a court order, the NCLTA is already working closely with the Real Property Section in crafting clear legislation. Ed is also serving on a Real Property Section committee in this area. That committee will work with the Estate Planning Section committee to come up with an acceptable version of House Bill 716. We discussed House Bill 716 in our June, 2001 newsletter.

The other areas under consideration by the NCLTA are:

(1) mortgage and deed of trust cancellation by the closing attorney (we recommended such a statute in our December, 2000 newsletter); (2) increasing the penalty for a lender failing to cancel a deed of trust; (3) inserting a "reasonable time" requirement for providing a tax statement under G.S. 105-361; (4) a statute governing simultaneous recording of deeds of trust providing for priority based on order of recording (see our August, 2001 newsletter); (5) clarification of the future advances statute; (6) a statute governing validity and effect of subordination agreements (see our October, 2001 newsletter); (7) a statute regarding subrogation of one deed of trust to another; (8) clarification of the scrivener's error statute, G.S. 47-36.1 (see our July; 2000 and Fal11999 newsletters); (9) clarification of foreclosure notice to subordinate lien-holders in absence of request for notice; (10) effect of ad valorem tax foreclosures on restrictions, easements, etc.; (11) amending restrictions under the UCA and UPCA (see our March, 2001 newsletter); (12) a statute clarifying easement of necessity; (13) clarifying G.S. 136-96 regarding withdrawal of dedication; (14) modifying and/or clarifying G.S. 29-30 and G.S. 30-3.1 through G.S. 30-3.6 pertaining to spousal rights (see our October, 2000 newsletter); and (15) modifying G.S. 45-81(c) – in view of Raintree – pertaining to payment and cancellation of an equity line deed of trust.

The NCLTA will also be monitoring, and making suggestions with respect to, the Construction Law Section's new effort to clarify the mechanics' lien statutes.

If you have any suggestions, please call Ed at 704- 333-9911, fax him at 704-372-4568 or e-mail him at ed.urban@att.net.

We would like to encourage attorney membership in the NCLTA. Membership is enjoyable, worthwhile and very economical. Penny DePas and Lauren Copen are the contact persons at 919-787-5181.

The NCLTA website is www.nclta.org

We appreciate your support.

Alton Russell, President  

RESTRICTIVE COVENANTS-ENFORCEMENT AS AFFECTED BY RADICAL CHANGE, WAIVER AND ESTOPPEL: THE MEDEARIS CASE 

The opinion in Medearis v. Trustees of Myers Park Baptist Church, C.D. Spangler Foundation, Inc. and Queens College, Inc., 2001 N.C. App. Lexis 1265, has been decided by the Court of Appeals. A petition for discretionary review has been filed by the petitioners, Medearis. A response to that petition has been filed. The facts below are lifted from the opinion. The opinion seems ambiguous as to counting lots acquired.

There were 14 lots in Block 37 of Myers Park subdivision. Lots 1 and 14B were not restricted. The deeds to Lots 3 through 14A contain identical deed restrictions, including a covenant that the property be used only for residential purposes and that the covenants run with the land. By 1929, ten of the twelve restricted lots had residences built upon them. The opinion states that by 1963, Myers Park Baptist Church ("MPBC") acquired three of the twelve restricted lots (actually; according to the opinion, it appears that the number may have been four – lots 3, 5, 11 and 14A), removed structures from two of them and built offices and class rooms on two of them. Thereafter, in 1971, Queens College acquired Lot 7 and the Jones House, which acquisition was used for parking since 1974. In 1989, MPBC acquired Lot 6 and the Pressley House and rented it for residential purposes until 1994 when it became vacant. It was demolished in 2000 by MPBC. In 1991, MPBC acquired Lot 4 and the Withers House. It was leased to Queens College until 2000 for college purposes. MPBC sold the house to the college in 2000 and moved it to Lot 8.

In 1997, the Foundation acquired Lot 12 and the Archer House. It agreed to donate the lot to MPBC. The Foundation sold the house for one dollar. The house was moved off the property in 2000. Lot 12 has been vacant since then.

The petitioners purchased Lots 9 and 10 from Mr. Medearis's parents for $880,000. Petitioners moved in on October 31, 1999. In November, 1999, the Foundation acquired Lot 11 and the Baldwin House, for $1.6 million. (But see the opinion's facts above.) This house was demolished on February 2, 2000 to prevent MPBC from having to obtain a zoning ordinance to build the Cornwell Center. The opinion states that in roughly eighty years since the completion of Block 37, MPBC acquired seven of the twelve restricted lots, removed or demolished at least five structures, and built several buildings for the church complex. One of the remaining five restricted lots belongs to the Foundation, which also demolished the house on the lot. Two of the remaining lots belong to Queens College and are used for parking, classes and social events. The remaining two restricted lots belong to petitioners, who use both lots for a single residence. Petitioners filed an action for declaratory judgment on August 3, 2000 seeking to enforce the residential restrictions against MPBC, the Foundation and Queens College. The trial court granted respondents' motions for summary judgment on October 26, 2000 and petitioners appealed.

One way that restrictive covenants may be terminated is when changes in the covenanted area are "so radical as practically to destroy the essential objects and purposes of the agreement." (Citations omitted.) (Emphasis added.)

The Court of Appeals noted that three of the twelve restricted lots were used for parking or, "one quarter of the lots " The court held that "parking could, under certain circumstances, constitute such a radical change as to destroy the restrictive covenant." The opinion states that prior cases are distinguishable. In one prior case, seven of approximately eighty-five restricted lots were used for parking. In another case, only one lot was used for parking.

The opinion states that in summary; Lots 5, 7 and 8 are currently used for parking, in violation of the restrictive covenant. Lot 13 is now used as a vehicle turn-around for church activities, in violation of the restrictive covenant. Lots 3 and 14A are currently used "openly and notoriously" by MPBC as offices and classrooms in violation of the restrictive covenant. Lot 4, the site of a house used for almost ten years in violation of the restrictive covenant, is now vacant. Lots 6, 11 and 12 are now vacant after all residential structures were either demolished or moved to prepare for the building of the Cornwell Center. The court noted that, at this part of its analysis, six of the twelve lots containing a residential restriction in Block 37 are in open and obvious violation of the restriction. Four other lots- 4, 6, 11 and 12 –  previously used for residential purposes now stand vacant in preparation for building the Cornwell Center. As of the filing of this appeal, Block 37 contains one residential structure. At this point in its opinion, the court seems to be noting as ominous for the petitioners that 50% (that is, six of twelve) of the restricted lots are in violation by virtue of use for parking (three lots), vehicle turn around (one lot) and offices and classrooms (two lots), before the respondents commenced their bulldozing and other activities on four other lots previously used for residential use.

The Court of Appeals held:

Based on our examination of the use of the lots in Block 37, we hold that the trial court did not err in granting summary judgment for respondents because the changes to Block 37 are "so radical as practically to destroy the essential objects and purposes of the agreement."

In their petition for discretionary review; the petitioners seem to argue that the respondents cannot profit from systematically acquiring lots and demolishing residences. The real issues could be restated as follows:

(1) Can the respondents add Lots 4, 6, 11 and 12 to the other lots to have the court find the above cited required "radical change"?

(2) If the answer to 1. above is "no," does 50% or 58% (depending upon how you count) of the lots being in prior violation for the reasons noted by the court constitute the required "radical change"? .

(3) Does "radical change" mean that the lots can no longer be used or sold for residential purposes?  

The respondents argue that seven of twelve residential lots were being used for non-residential purposes at the time the petitioners bought their home.  See p. 3 of Respondents' Joint Opposition To Petition For Discretionary Review.

It seems as though, whether it is expressly articulating it or not, the Court of Appeals is holding that non-residential uses of lots in violation of the restrictions, while not radical enough per se (with respect to each lot) to constitute the required radical change, can constitute a radical change as to the entire subdivision if a majority of the lots are in violation. The respondents forcefully argue the importance of the number of lots being in violation of the covenants. See, for example, Respondents' Joint Opposition To Petition For Discretionary Review; p. p. 12-14, and p. 15.

The Court of Appeals also held that the petitioners waived their right to enforce the covenants, even assuming the trial court erred in finding termination of the covenants based on the radical change test. The court stated that the first time the petitioners raised the issue of enforcing the covenants was on May 18,2000, dismissing the petitioners' prior negotiations with MPBC by noting: "Notwithstanding the numerous negotiations, Mr. Medearis never requested that MPBC not build the Cornwell Center," and noting the respondents' incurring of significant expense to build the center.

The title insurance industry should be encouraged by this decision. We hope and believe that it will stand. It should make it easier to respond to customer requests to insure against loss or damage caused by the enforcement of residential restrictions against commercial or other non- residential use, particularly if the effect of the number of, or percentage of, violations is clarified should the Supreme Court hear the case. It is noted that, once a judgment that the restrictions are terminated becomes final, any non- residential use permitted by the zoning ordinances will be permissible. Of course, when a title insurer analyzes a request to insure before such litigation is filed and a judgment is entered, it must do so carefully so that it does not subject the insured, and itself, to litigation. That will mean (1) carefully applying Medearis and cases cited therein to the facts to be analyzed and (2) determining if there are homeowners or a homeowners' association contemplating legal action regardless of what the insurer thinks of the case. If the insurer feels that the case is easily in point with Medearis and there is no threat of litigation, it can insure. If litigation is threatened, it can insure if appropriate precautions are taken to avoid losing a fortune for attorneys' fees. The precautions can include (1) the policy excluding attorneys' fees, costs and expenses of litigation or (2) more likely; not excluding liability for the fees, costs and expenses, but escrowing an amount to cover such items, the amount coming from either the seller or buyer or both, pursuant to an agreement.

By way of disclosure, in mid-1998, our company issued one of the title policies involved. Our attorneys defending against the petitioners' claims are to be congratulated for their outstanding litigation work.  

CORPORATIONS, LLCS ANO PARTNERSHIPS – SENATE BILL 842 

Senate Bill 842 was signed into law on August 26, 2001. It is a lengthy bill and covers quite a bit. Of particular note is the bill's clarification of conversion of one business entity to another. New Article 11A of Chapter 55 provides for conversion of a business entity to a domestic corporation and conversion of a domestic corporation to a different business entity: New Part 1A of Article 9A of Chapter 57C provides for conversion of a domestic LLC to a different business entity: New Part 2 of Article 2A of Chapter 59 provides for the conversion of a business entity to a domestic partnership. G.S. 59-1050 has been amended. It pertains to conversion of a business entity to a domestic limited partnership. New Part 10B of Article 5 of Chapter 59 pertains to the conversion of a domestic limited partnership to another business entity:  

These statutes require a plan of conversion (see, for example, G.S. 55-11A-02; G.S. 55-11A-11; G.S. 57C-9A-11; G.S. 59-73.11; G.S. 59-73.21; G.S. 59-1051; and G.S. 59- 1061), the filing with the Secretary of State articles for the new entity and the registration of a certificate of conversion in the real property records under G.S. 47-18.1 (G.S. 55-11A-03; G.S. 55-11A-12; G.S. 57C-9A-12; G.S. 59-73.12; and G.S. 59-73.22), and provide for the effects of the conversion (G.S. 55-11A-04; G.S. 55-11A-13; G.S. 57C-9A-13; G.S. 59-73.13; and G.S. 59-73.23). Title to real property vests in the new entity without impairment.  

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