January 2000

A PUBLICATION OR THE TITLE COMPANY OF NORTH CAROLINA

 

ADMINISTRATION OF ESTATES ISSUES - JUDGMENTS AND LIENS AGAINST DEVISEE OR HEIR

On occasion, a judgment or lien will be docketed against a person who subsequently becomes an heir or a devisee upon the death of a decedent. When the decedent dies, to what extent does such a judgment or lien affect the title to the decedent's real property?

A devisee or an heir acquires title to real property subject to the personal representative's right to sell the real property for estate purposes pursuant to the estate administration laws of North Carolina. G.S. 28A-13-3(a)(1); G.S. 28A-13-3(a)(27) (referring to Article 17 of Chapter 28A); G.S. 28A-13-3(a)(31); G.S. 28A-13-3(c); G.S. 28-15-1; Linker v. Linker, 213N.C. 351, 196 S.E. 329 (1938); Wadford v. Davis, 192 N.C. 484, 135 S.E. 353 (1926). The devisee or heir will have title until the personal representative's power to sell is exercised, in which case the purchaser's title relates back to the decedent's death.  See, generally, C.J.S. Executors and Administrators 148.  Therefore, it would seem clear that if a personal representative is exercising a statutory power to sell real property to pay debts of the decedent or is exercising a power of sale in the will in order to do so, the sale of the land would be free and clear of the judgment lien against the heir or devisee.  This would be because of the interest of the judgment lienor should rise no higher than the interest of the heir or devisee.  There is no clear and express statutory provision to that effect, however.  This concept is discussed in Linker, supra, and Wadford and in E. Urban and G. Whitney, North Carolina Real Estate 13-43 (Harrison Co. 1996).

In the Wadford case, the rationale, citing old C.S. 56, is that when land of the estate is sold to make assets to pay debts, the proceeds of the sale necessary to pay the debts of the estate are considered personal property and the surplus proceeds of the sale constitute real estate.  Therefore, all proceeds form a sale which are not necessary to pay debts and administration charges shall be considered real estate and shall be paid by the executor or administrator to those persons who would have been entitled if the land was not sold.  In the case's proceeding, the executor filed an action and joined all of the devisees.  At 192 N.C., p. 488, the court stated that the judgment creditors of the devisee had liens on the land that the testator willed to the devisee subject to all valid claims of the estate and its creditors.

Linker involved an interstate administration.  The case reiterated the proposition that when land is sold to make assets to pay debts the proceeds necessary to pay debts are personal property and the surplus proceeds go to the heirs of the land, as, in effect, land, as if the land had not been sold, the court citing old C.S. 56.  The court goes on to state that judgment creditors of an heir are entitled to pro-rata payment out of the heir's share.  In other words, under the judgment priority statute, the judgments among themselves do not have priority against each other but there is pro-rata sharing.  In such a case, the judgments have equal priority.

After such a sale of the land, logic seems to dictate and the cases indicate that the purchaser of the land takes title free of such judgment liens against an heir or devisee even though surplus proceeds, in the nature of land pursuant to the cases, are not distributed until later or, due to misfeasance or nonfeasance of the personal representative, not at all.  This is because of the passage of title free of the liens and the conversion of the land into cash, part of which is in the nature of personal property to pay debts of the decedent and part of which is in the nature of land for the heirs, devisees or lienors.

What procedure must be followed?  If it is determined by the personal representative that it is in the best  interest of the administration of the estate to sell property to pay debts against the decedent's estate, the personal representative shall institute a special proceeding under Article 17 of Chapter 28A, except that no proceeding is required for a sale made under authority given by a will.  G.S. 28A-15-1(c). Any existent heir or devisee is a necessary party to t he special proceeding.  G.S. 28A-17-4.  When the real property, or any interest therein, is claimed by another person, such claimant may be made a party to the proceeding and may become a party on his own motion.  G.S. 28A-17-6.  It would seem that persons holding liens docketed against an heir or devisee may be made parties, but are not necessary parties.  Following the rule of other areas of the law, if they are  not made parties, they may not be bound by the proceeding and can later litigate legal issues.  However, it is uncertain that this would be the result under Chapter 28A.  The safe course would be to make such lienors parties.

However, as G.S. 28A-15-1(c) points out, a power granted to a personal representative in a will does not require an Article 17 special proceeding.  It would therefore seem that if the will granted a personal representative (1) a clear and broad power to sell the land of the decedent under any circumstances and this power was being exercised to create assets to pay debts and expenses of the estate or (2) a clear precise power to sell land to make assets to pay such debts and expenses and the power was exercised for such purpose, the personal representative could exercise the power of sale, the grantee would acquire title free of any lien previously docketed against an heir or devisee and, to the extent the sale proceeds were not necessary to pay debts and expenses of the estate, the liens against heirs or devisees would be paid in accordance with the above cited cases.

Chapter 28A also allows the personal representative to mortgage estate property under the circumstances provided in G.S. 28A-15-1(c), G.S. 28A-17-11 and G.S. 28A-13-3(a)(12).  It is unclear whether a mortgage or deed of trust placed on land by the personal representative will have priority over liens previously docketed against an heir or devisee.  The statutes are silent.  Logically, such a mortgage or deed of trust should have priority, whether the mortgage or deed of trust is placed on the land pursuant to a clear power in the will or pursuant to an Article 17 proceeding, as long as the loan is obtained to pay debts and expenses of the estate.  However, the safe course would be to institute a special proceeding and join heirs, devisees and the lienors for a complete determination of rights and priorities.

And what of a power of sale contained in a will whereby the personal representative is granted the clear discretionary power to sell the decedent's real property without a court order for reasons other than to pay debts of the estate; for example, to sell real property for the best price and to distribute proceeds to the heirs or devisees?  There is no clear statutory solution to this situation either.  It would seem that if there are funds generated by the sale sufficient to pay all liens against the heirs or devisees, the simple solution is for those liens to be paid and cancelled of record during the course of the personal representative's sale.  Somewhat more problematical is the case where the sale proceeds are not enough to pay and cancel of record all such liens.  It seems arguable, but  not definite, that since the heir's or devisee's real property is subject to such a discretionary power of sale for such purposes, so should be the interests of those lienors.  However, such sales are not within the bounds of the cases described above.  Also, a mortgage or deed of trust given by the personal representative for such purposes could be a problem.

Of course, if real property is distributed to t he heirs or devisees without being sold during administration, the prior liens against the heirs or devisees would attach with equal priority.

It is noted that a prior federal tax lien attaches to subsequently acquired real property of an heir or devisee, but it is believed that such attachment would be subject to the principles set forth above.  See 26 U.S. C. 6321 (lien attachment), and Plumb, Federal Tax Liens, p. 26 (ALI/ABA 1972, supp. 1974).

It would seem that Chapter 28A could benefit greatly from a new section that clearly resolved the issue of liens against devisees and heirs.  Such a statute could provide that:  "When a personal representative sells real property of the decedent owned by the decedent at the time of the decedent's death and such sale occurs pursuant to (i) a power of sale in de decedent's probated will or (ii) a sale authorized pursuant to Article 17 of this Chapter, and the sale is binding upon any heir or devisee of the decedent, the sale will also be binding upon any lienor having a lien against any heir or devisee and the title to the real property conveyed to the grantee pursuant to such sale will be free and clear of any such lien.  The grantee shall have no responsibility or liability to see to it that any sale proceeds are paid to any such lienor and the grantee's title to real property shall be unaffected by any failure of the personal representative or any other party to pay sale proceeds to any such lienor."  Any such proposal should also consider whether a non-Article 17 proceeding must make the lienors a party and whether a non-Article 17 sale should require written notice to such lienors.  Mortgages and deeds of trust executed by the personal representative should also be dealt with in a way that grants such an encumbrance priority over any lien docketed against an heir or devisee.  It is noted that the above proposal would address not only sales to make assets to pay debts and expenses, but also any other sale otherwise binding on heirs and devisees.

A subsequent newsletter will address other aspects of powers of sale by a personal representative.

ALTA ENDORSEMENT FORMS 9, 9.1, AND 9.2

In out last newsletter, we discussed ALTA (American Land Title Association) zoning endorsements.  Below, we will briefly discuss the ALTA Form 9 endorsements.

ALTA Endorsement Form 9 (revised 10/17/98) covers certain problems pertaining to restrictions, encroachments an minerals.  It is for loan policies only.  The endorsement is available for commercial or residential transactions.

In ALTA Form 9, restrictions are dealt with in Paragraphs 1(a), 1(b)(1), 1(b)(2), 1(b)(5), 2 and 5.  The lead paragraph of the endorsement states that:  "The Company insures the owner of the indebtedness secured by the insured mortgage against loss or damage sustained by reason of:"  Then, the restrictive covenant matters insured against in Paragraph 1 are included in various paragraphs as follows: "1. The existence at Date of Policy of any of the following: (a) Covenants, conditions or restrictions under which the lien of the mortgage referred to in Schedule A can be divested, subordinated or extinguished, or its validity, priority or enforceability impaired. (b) Unless expressly excepted in Schedule B:  (1) Present violations on the land of any enforceable covenants, conditions or restrictions, nor do any existing improvements on the land violate any building setback lines shown on a plat of subdivision recorded or filed in the public records.  (2)  Any instrument referred to in Schedule B as containing covenants, conditions or restrictions on the land which, in addition,  (i) established an easement on the land; (ii) provides a lien for liquidated damages,  (iii) provide for a private charge or assessment;  (iv) provides for an option to purchase, a right of first refusal or the prior approval of a future purchaser or occupant...  (5) Any notices of violation of covenants, conditions and restrictions related to environmental protection recorded or filed in the public records." Next coverage in Paragraphs 2 and 5 is set out as follows:  "2. Any future violation on the land of any existing covenants, conditions or restrictions occurring prior to the acquisition of title to the estate or interest in the land by the insured, provided the violation results in:  (a) invalidity, loss of priority, or unenforceability of the lien of the insured mortgage; or  (b) loss of title to the estate or interest in the land if the Insured shall acquire title in satisfaction of the indebtedness secured by the insure mortgage...  5.  Any final court order or judgment denying the right to maintain any existing improvements on the land because of any violation of covenants, conditions or restrictions or building setback lines shown on a plat of subdivision recorded or filed in the public records."  The endorsement continues by saying:  "Whenever in this endorsement the words 'covenants, conditions, or restrictions' appear, they shall not be deemed to refer to or include the terms, covenants, conditions or limitations contained in an instrument creating a lease. As used in Paragraphs 1(b)(1) and 5, the words 'covenants, conditions or restrictions' shall not be deemed to refer to or include any covenants, conditions or restrictions relating to environmental protection."

It is noted that lender restriction coverage in 1(b) exists unless there is a Schedule B exception to the contrary.  It is important to note that under 1(b)(2), a covenant, condition and restriction document must be examined by the title insurer to make sure (1) that the document does not contain provisions referred to in 1(b)2(i) through (iv); or (2) that Schedule B expressly excepts to such items; or (3) that the lender and title insurer agree on additional affirmative coverage over such items based on, for example, release of assessment liens or options to purchase.

In the ALTA Form 9, 1(b)(3), 1(b)(4), 3(a) and 4 deal with encroachments.  Loss or damage is covered in 1(b)(3) and 1(b)(4) for the following matters:  "(3) Any encroachment of existing improvements located on the land onto adjoining land, or any encroachment onto the land of existing improvements located on adjoining land.  (4) Any encroachment of existing improvements located on the land onto that portion of the land subject to any easement excepted in Schedule B."  Paragraphs 3(a) and 4 cover the following:  "3. Damage to existing improvements, including lawns, shrubbery or trees:  (a) which are located on or encroach upon that portion of the land subject to any easement excepted in Schedule B, which damage results from the exercise of the right to maintain the easement for the purpose for which it was granted or reserved...  4. Any final court order or judgment requiring the removal from any land adjoining the land of any encroachment excepted in Schedule B."

It is noted that 1(b)(3) is included to overcome the argument that loss or damage caused by the location of (otherwise appurtenant) improvements on adjoining land is not covered by the policy because of the policy Conditions and Stipulations' definition of "land" as including land described in Schedule A and improvements located thereon but not including any property beyond the lines described or referred to in Schedule A. It is noted that an express Schedule B exception can remove this coverage and 1(b)(4) coverage.

3(b) provides the following coverage:  "3. Damage to existing improvements, including lawns, shrubbery or trees:...  (b) resulting from the future exercise of any right to use the surface of the land for the extraction or development of minerals excepted from the description of the land or excepted in Schedule B."

For the first time, the ALTA prepared two owners' endorsements as described below.

ALTA Endorsement -- Form 9.1 (Restrictions, Encroachments, Minerals - Owner's Policy - Unimproved Land) was approved in 1998.  Paragraph 1(a) was patterned after Paragraph 1(b)(1) of the lender's ALTA 9 form discussed above. Paragraph 1(b)(i) corresponds to ALTA 9 Paragraph 1(b)(2)(i); Paragraph 1(b)(ii) corresponds to ALTA 9 Paragraph 1(b)(2)(iv) and Paragraph 1(b)(iii), which has no counterpart in Paragraph 1(b) of the ALTA 9 endorsement, insures against loss or damage caused by: "Any instrument referred to in Schedule B as containing covenants, conditions or restrictions on the land which, in addition,... (iii) provides a right of reentry, possibility of reverter or right of forfeiture because of violations on t h land of any enforceable covenants, conditions or restrictions." However, this 1(b)(iii) coverage is the functional equivalent of ALTA 9 Paragraph 1(a) and Paragraph 2 coverage.  ALTA Form 9.1 Paragraph 1(c) corresponds to the lenders' ALTA 9 Paragraph 1(b)(3).  Paragraph 1 of Form 9.1 does not include Form 9 Paragraph 1(b)(4) coverage discussed above.  Paragraph 1(d) of Form 9.1 corresponds to Form 9 Paragraph 1(b)(5) coverage.  Paragraph 2 of Form 9.1 insures against loss or damage caused by: "Damage to buildings constructed on the land after Date of Policy resulting from the future exercise of any right existing at the Date of Policy to use the surface of the land for extraction or development of minerals excepted from the description of the land or excepted in Schedule B."  This should be compared with ALTA 9's Paragraph 3(b), discussed above.  Obviously, Form 9.1 does not cover lawns, shrubbery or trees as does ALTA 9.  Form 9.1 does not contain Form 9's Paragraph 3(a) coverage.  Form 9.1 does not contain ALTA 9 Paragraphs 4 and 5 discussed above.  But Form 9.1 coverage in Paragraph 1(a) is adequate coverage for restrictive covenants violations.

ALTA Endorsement -- Form 9.2 (Restrictions, Encroachments, Minerals - Owner's Policy - Improved Land) has been promulgated. ALTA Form 9.2 is identical to Form 9.1 discussed above except as follows:  Form 9.2's Paragraph 1(d) corresponds to Paragraph 1(b)(4) of the lender's ALTA 9 discussed above. 1(d) doers not appear in Form 9.1.  Form 9.2's Paragraph 1(e) corresponds to Paragraph 1(d).  Unlike Form 9.1, Paragraph 2 of Form 9.2  corresponds to Paragraph 3 of the lender's Form 9 except that reference in Form 9.2 is made to damage to existing buildings, whereas Form 9 also includes lawns, shrubbery or trees.  Form 9.2 also contains Paragraphs 3 and 4 corresponding to ALTA Form 9's Paragraphs 4 and 5 noted above.  Form 9.1 does not contain these paragraphs.  Both Form 9.1 and Form 9.2 contain ALTA Form 9's clarification of what "covenants, conditions or restrictions" mean in the applicable endorsement situations.

These endorsements are available from The Title Company of North Carolina.  They can be used on commercial or residential transactions.

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