June 2002

A PUBLICATION OR THE TITLE COMPANY OF NORTH CAROLINA

     

JOHN H. NOBLITT [1948-2002] 

As the announcement of John's passing so warmly stated, John "peacefully left his brain tumor behind" on June 21, 2002. He had just turned 54. John established the Chicago Title office in Charlotte after graduating from Duke in 1970 and Wake Forest University School of Law in 1976. John's tremendous contribution to Chicago Title's good fortune was also attended by his service to the title industry. John served as President of the North Carolina Land Title Association (NCLTA) from 1987-1988 after serving in lesser positions on the Executive Committee. Subsequently, John served as NCLTA General Counsel. John retired a while ago with Stewart Title after courageously trying to continue his work. John was a bright, accomplished, interesting, and witty man and professional. He was an active member of the Myers Park United Methodist Church and was very much involved in his son's Indian Guides activities, serving as Big Soaring Dragon.

John's beautiful service on June 25, 2002 recalled his wonderful life.  

John is survived by his many friends and family, including his wife Heloise and young son Ian. John will be missed and remembered fondly. Our thoughts are with his family in this time of sadness.  

FTC ACTIVITIES JUNE 24, 2002 REPORT OF THE SPECIAL COMMITTEE  [N.C. STATE BAR] ON REAL ESTATE CLOSINGS 

This report pertains to residential real estate closings and a full day evidentiary hearing on June 7, 2002.  

The Special Committee recommends that the Council adopt (1 ) a new ethics opinion and (2) a new advisory opinion on the authorized practice of law.  

Quoting from the report:  

"The effect of the adoption of the proposed new ethics opinion would be to do the following:  

  • Withdraw the ruling in Formal Ethics Opinions 2001-4, 2001-8, and 99-13 that competent legal practice requires the physical presence of the lawyer at the execution of the documents for both an initial purchase and a refinancing of residential real estate.  

  • State the conclusion that a properly supervised non-lawyer assistant may oversee the execution of documents and disbursement of proceeds.  

  • Indicate that the State Bar is aware of and does not disapprove of the increasingly popular and widespread practice of closing residential real estate transactions by mail and by other "remote" means that do not involve a traditional conference attended by the parties and the lawyer(s). 

In considering the "physical presence requirement" that the Agencies have challenged, the Special Committee concluded that the State Bar should not micro-manage the residential real estate practice to the extent that the State Bar instructs lawyers about when and how to communicate with clients. This is particularly so in view of technological improvements that make it ever-easier to communicate with clients and to handle transactions remotely and electronically. Antitrust counsel, Everett Bowman of Robinson, Bradshaw & Hinson, P.A., will address separately the antitrust considerations concerning the recommendation that this ethics opinion be adopted. 

We recommend that the Council adopt, in addition to the new ethics opinion, the proposed new authorized practice opinion. ..the effect of which would be to do the following:

  • Indicate that the State Bar has concluded not to presume that a person overseeing the execution of documents and disbursement of proceeds in a residential real estate transaction will inevitably give legal advise or opinions in violation of the UPL statutes.  

  • Permit non-lawyers to oversee the execution of documents and disbursement of proceeds in such transactions provided that the non-lawyer gives no legal advise or opinions. 

The Special Committee's reasoning is based in large part on the North Carolina statutory provisions that appear to contemplate that a lay "closing agent" or "settlement agent" may conduct these oversight and disbursement activities in lieu of a lawyer. Again, Mr. Bowman will address antitrust considerations separately. (Footnotes omitted.)"  

Comment supporting the residential attorney is being prepared by the NCLTA. 

FEDERAL TAX LlENS   AN UPDATE ON ENTIRETY PROPERTY, PARTNERSHIP PROPERTY AND PURCHASE MONEY DEED OF TRUST ASPECTS 

1.  General comments.  

In an April 2002 newsletter, we set forth our comments on U.S. v. Craft, 535 U.S. _____ (U.S. Supreme Court 2002). The case, decided on April 18, 2002, was neither expressly retroactive nor expressly prospective. Unless the court expressly says that the opinion applies only to federal tax liens docketed after the decision and it did not we must assume that the court is saying that this is what the law has always been and real property attorneys and lower courts, as well as Justice Thomas and the other dissenters, have been under a terrible misunderstanding of what the law has always been. In other words, the case applies to a federal tax lien docketed against one of two spouses owning land as tenants by the entirety even before April 18, 2002; that is, the case has retroactive application. That was the implication of our April 2002 treatment of the case. Let us know if you need a copy of that newsletter, since we do not want to restate its content here. (We did state that we do not expect people to "look behind" prior policies tacked on to.)  

The above notwithstanding, we have been asked about, for example, a situation where it comes to the attention of the approved attorney that, prior to April 18, 2002, a federal tax lien has been filed against one spouse and both spouses own property as tenants by the entirety and a deed of trust recorded before the federal tax lien is docketed has been properly foreclosed except that no federal statutory notice has been given to the I.R.S. pursuant to 26 U.S.C. 7425, as discussed in our December, 2000 newsletter, and the foreclosure purchaser now wants to convey or mortgage the property. The practical, if not legal, answer has to be that we need to know how much is the federal tax lien and was there value, or equity, in the property above the amount of the foreclosed deed of trust? If the deed of trust cannot be accorded the benefit of the "purchase money rule" discussed below, it may be that the I.R.S. will issue a release if the I.R.S. determines that the I.R.S.'s position has no value. 26 U.S.C. 6325. (Various releases and certificates of non-attachment are discussed in Urban and Whitney, North Carolina Real Estate 21-48.)  

2. Purchase money deed of trust v. prior federal tax lien.  

With respect to a purchase money deed of trust, see our Issue 2, Spring 1998 article and Urban and Whitney, North Carolina Real Estate 21-72 (generally) and 21-46 (federal tax liens). Generally, if the deed to the buyer(s) and the deed of trust to a trustee for either the seller(s) or a third party lender are executed, delivered and recorded approximately simultaneously, the deed of trust will have priority over a judgment docketed against the buyer(s) before acquisition of title if the proceeds are used to pay the purchase price and closing costs. An eleven day gap between recording the deed and deed of trust prevented the application of the rule. Also, to the extent the deed of trust secured construction loan advances, the rule did not apply. The rule has been held to apply to a federal tax lien. The rule applies to a federal tax lien on the basis that the buyer(s) had no interest for the federal tax lien to attach to prior to the deed of trust attaching. Whether the "purchase money rule" will be the next thing that the I.R.S. attacks is interesting to contemplate. However, we believe that the purchase money rule will not go the way of the tenancy by the entirety rule and so, we will insure the priority of a purchase money deed of trust against a prior federal tax lien docketed against the buyer(s) in accordance with the purchase money rule. However, if you discover such a tax lien, you should report the tax lien so that we can (1) make sure that the purchase money rule applies and (2) insert the lien in Schedule B-11 of the loan policy as a subordinate lien and insert the lien in Schedule B of the owner's policy.  

3.  Partnerships and Craft.  

A federal tax lien for the individual tax liability of A (who is also a partner in ABC Partnership) does not attach to title to real property vested in the partnership. The property rights of a partner are (1 ) his right in specific partnership property; (2) his interest in the partnership and (3) his right to participate in management. G.S. 59-54. G.S. 59-55 sets out the nature of a partner's right in specific partnership property. A partner is "co-owner with his partners of specific partnership property holding as a tenant in partnership." G.S. 59-55(a). The incidents of this tenancy are outlined in G.S. 59-55(b). Generally, the partner cannot possess the property for other than partnership purposes. The right is not assignable except in connection with assignment of rights of all the partners in the same property. A partner's right in specific partnership property is not subject to attachment or execution. G.S. 59-55(b)(3). A partner's interest in the partnership is his share of the profits and surplus, which is personal property. G.S. 59-56. This is true even though a partnership asset is real property. Bright I,: Williams, 245 N.C. 648, 97 S.E.2d 247 (1957). A partner's interest is subject to a charging order under G.S. 59-58. Both the majority and the dissent in U.S. v. Craft recognize that what all of these sections of the Uniform Partnership Act mean is that a federal tax lien filed against an individual partner for his individual tax liability does not constitute a lien on partnership property. J. Thomas, dissenting opinion, at p. 6, n. 4 and J. O'Connor, majority opinion, at p.p. 11-12.  

4. Concluding remarks.  

Of course, none of this analysis, pertaining to entirety property in particular, would be necessary if the majority had not made such a mess of the law in this area. The majority relied upon Drye v. U.S., 528 U.S. 49 (1999), discussed in Estates -Renunciation, Disclaimer and Federal Tax Liens in View of Drye, Jr., set out in our March, 2001 newsletter. That case disregarded a state law renunciation by the taxpayer against whom the lien was filed. J. Thomas pointed out that Drye involved an actual property interest to which the lien could attach, thereby distinguishing Craft. Dissenting opinion, p. 5.  

In the dissenting opinion, J. Thomas makes it clear that there are two concepts subject to a federal tax lien filed against one of the spouses under 26 U.S.C. 6321: "property and rights to property, whether real or personal, belonging to such person." J. Thomas states that the property did not belong to the taxpayer, since it was entirety property.  J. Thomas shows persuasively that the "rights to property" which the husband owned, even if subject to a lien, should not result in the lien being extended to the title to the entirety property as the majority ruled. He notes that the majority does not suggest that the lien attached to any of the husband's actual rights to property, such as the right of survivorship (the taxpayer-husband predeceased the wife!), the right to exclude from possession persons other than the wife and the right to enjoy rents and profits with the wife. Dissenting opinion, p.p. 5-6. The majority talks about "a bundle of sticks," illustrating how unfortunate it was that the respondent was not sufficiently up on the laws of sticks instead of the law of real property. Is it not a law school requirement for Supreme Court justices to take and pass Real Property 1?  

BANKRUPTCY--FAILURE TO PROPERLY EXECUTE AND RECORDAND 11 U.S.C. 544 AVOIDANCE PROBLEMS 

The case of In Re Kline, 242 B.R. 306 (Bankr. W.D.N.C. 1999), is to be noted for several principles. In the case, the following occurred: (1) 5-15-95: debtors purchased land in Cleveland County and gave a deed of trust securing BB&T recorded in that county; (2) 8-25-97: debtors gave First Plus a second deed of trust encumbering the land; (3) 9-9-97: First Plus deed of trust is recorded in Cleveland County (First Plus knew it was second and subordinate to BB&T); (4) 4-23-98: Debtors gave a deed of trust to MIC, which was inadvertently recorded in Gaston County but was not recorded in Cleveland County, the secured proceeds being used to payoff the 88& T loan which resulted in BB&T canceling its deed of trust; (5) subsequently, MIC assigned its interest to Source One and Source One assigned to Litton; (6) 12-16-98: the debtors filed a Chapter 7 petition; (7) 12-17-98: trustee in bankruptcy was appointed; and (8) 6-12-99: trustee filed adversary proceeding.  

Under 11 U.S.C. 544, known as the "strong arm statute," the trustee in bankruptcy has avoidance powers and has the status of a bona fide purchaser who has perfected a transfer at the time of the commencement of the bankruptcy case. Under 11 U.S.C. 544, G.S. 47-20 and G.S. 47-20.1, the trustee's interest as a bona fide purchaser {hypothetical, to be sure) is superior to the MIC deed of trust recorded in the wrong county. 11 U.S.C. 550{a) provides when a voidable transfer under 11 U.S.C. 544 can be voided against MIC and successors. The transfer to MIC need not be properly recorded to be a "transfer" under 11 U.S.C. 101{54) that is avoidable under 11 U.S.C. 544.  

The avoided transfer was automatically preserved for the trustee under 11 U.S.C. 551.  

Even though the trustee could avoid the MIC deed of trust, in preserving it for the trustee, the trustee was allowed to maintain the fact that the MIC deed of trust was equitably subrogated to the priority position of the BB&T deed of trust as against First Plus. First Plus was not a bona fide purchaser when it made its second deed of trust (First Plus knew of its second lien status) and First Plus did not change its position in reliance upon the fact that MIC recorded in the wrong county. In fact, if the debtors had not filed bankruptcy, as between First Plus and MIC, MIC could have still recorded its deed of trust in Cleveland County and sought equitable subrogation to BB&T's first priority deed of trust. Now the trustee was entitled to first priority. The court cited North Carolina subrogation cases. In Re White, 183 B.R. 713 (Bankr. M.D.N.C. 1995); Wallace v. Benner, 200 N.C. 124, 156 S.E. 795 (1931 ); Peek v. Wachovia Bank & Trust Co., 242 N.C. 1, 86 S.E.2d 745 (1955).  

In Re Price, 97 B.R. 264 (Bankr. E.D.N.C. 1989), is a similar case. The following occurred: (1) 1-27-87: the debtors borrowed $69,000 from Southern which was secured by a properly recorded deed of trust; (2) subsequently, the debtors borrowed approximately $39,000 from Planters which was secured by a properly recorded deed of trust (Planters understood its second lien position); (3) 2-23- 88: the Southern deed of trust was accidentally cancelled; (4) 9-15- 88: the debtors filed a Chapter 7 petition.  

11 U.S.C. 544(a)(3) allowed the trustee to avoid Southern's lien. However, Planters did not move into first position, since Southern's lien was preserved for the estate under 11 U.S.C. 551. As between Southern and Planters, Southern could rescind its accidental cancellation. Monteith v. Welch, 244 N.C. 415, 94 S.E.2d 345 (1956). Planters was not a bona fide purchaser with respect to Southern's lien, since Planters knew of Southern's lien when Planters made its loan and Planters did not change its position in reliance on the erroneous cancellation.  

These cases and the statutes they discuss are important for other reasons as well. To be properly recorded, a deed or deed of trust must be validly executed, acknowledged, recorded and indexed. G.S. 47-18; G.S. 47-20; G.S. 47-20.1. A delay in recording and indexing or the recording and indexing of a document which bears a faulty execution or acknowledgment can also cause difficulty if the grantor of the instrument then files bankruptcy. This is because of the trustee's status as a judicial lien creditor under 11 U.S.C. 544(a)(1) and a bona fide purchaser under 11 U.S.C. 544(a)(3). If after that status is attained, an executed and acknowledged document that has not been recorded is subsequently recorded and indexed voidability problems under 11 U.S.C. 544 can exist. If a document that has been recorded and indexed prior to the bankruptcy but was invalidly executed or acknowledged a similar problem can arise. Correction and rerecording subsequent to bankruptcy would not matter if the original recording was ineffective.  

OPTIONS TO PURCHASE -- TIMELY EXERCISE AS BETWEEN THE PARTIES AND AS AGAINST THIRD PARTIES 

Sharpe v. Sharpe, _____ N.C. App. _____, 563 S.E.2d 285 (2002), shows how a will can grant an option to purchase land. The clause in the will gave the holder of the option 6 months from the date of the qualification of the executor to exercise the option. The option contained no requirement that the purchase price be tendered during that time period. Within the option period, the holder of the option sent the executor a letter "reaffirming my intention of exercising my option to purchase the land as described in Edith Sharpe's will." That was enough to be a valid exercise under a line of cases, including Kidd v. Early, 289 N.C. 343, 222 S.E.2d 392 (1976).

In Trogden v. Williams, 144 N.C. 192, 56 S.E.2d 865 (1907), an option dated January 16, 1905, stated that the option period was 90 days. The option stated that if the parties elected to buy within the period, they then had to pay $10,000: $5,000 in cash and the rest within one year of the first payment. The option was recorded May 4, 1905. On June 28, 1905, another party was given a contract to purchase. The court stated that, since no deed appeared of record, that party was entitled to assume that the option had ended. One commentator has stated that with respect to "recent options," prudence would seem to dictate that inquiry be made as to whether the option lapsed or had been exercised (apparently by off-record notice) or was in dispute, even though, within the option period, there appeared of record no deed, extension of the option or notice of lis pendens. M. Happer, Real Estate Contracts and Options, appearing in Real Property Practice-1979, lll-1 et seq., at lll-11, lll-12 (N.C. Bar Assoc. 1979).

An extension of a lease is not per se an automatic extension of the option to purchase contained therein. The intention of the parties controls. Davis v. McRee, 299 N.C. 498, 263 S.E.2d 604 (1980). 

RULE AGAINST PERPETUITIES AND CONTRACTS 

Where a seller and buyer entered into an unrecorded contract to sell real property and the provisions of the contract provided that if the buyer resold lots an availability fee would be paid to the seller and prior to sale by the buyer the buyer would insert such a provision into recorded restrictions further providing for a lien for any unpaid fees, the Supreme Court held that the contractual provision did not violate the common law rule against perpetuities. Title to the land was not affected. The contract did not involve a non-vested future interest. See Rich, Rich & Nance v. Carolina Construction Corporation,_____ N.C. _____558 S.E.2d 77 (2002), reversing and remanding 144 N.C. App 303, 548 S.E.2d 541 (2001). The Court of Appeals case is discussed in A. Dexter, The Rule Against Perpetuities in Commercial Transactions, 23 Real Property Vol. 1 (NCBA Real Property Sec. February 2002).  

 

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