A PUBLICATION OR THE TITLE COMPANY OF NORTH CAROLINA
Website: www.oldrepublictitle.com/nc for our newsletters, newsletter index
MAY 2003 TCNC NEWSLETTER
FORECLOSURES UNDER POWER OF SALE – NOTICE TO SUBORDINATE LIENHOLDERS
other than federal tax liens.
A. The Mennonite case.
In 1983, The U.S. Supreme Court decided Mennonite
Board of Missions v. Adams, 103 Sup.Ct. 2706 (1983). The case dealt
with a tax foreclosure statute in Indiana. That statute did not require
notice to be given to the holder of a lien that was subordinate to the tax
lien. No notice was mailed to Mennonite, the second lienholder. Notice was
published in the newspaper pursuant to the statute. The U.S. Supreme Court
held that the notice did not satisfy due process requirements of the 14th
Amendment to the U.S. Constitution. The Court stated that, in order for
notice to be constitutional, the notice must be reasonably calculated to
apprise the second lienholder of the pending foreclosure sale under the
prior lien. The notice must be mailed to the subordinate lienholder’s
last known reasonably ascertainable available address or must be
personally served. (103 Sup.Ct., 2711.) Constructive notice through
publication is not sufficient.
Carolina law and underwriting practice.
North Carolina has a power of sale foreclosure
statute. Notice of hearing is required to be given to a “record
owner.” This term does not
include, and specifically excludes, a subordinate lienholder. G.S.
45-21.16(b)(3). The notice of hearing is posted and published in a
newspaper pursuant to G.S. 45-21.17. The notice of sale must be mailed by
first class mail to each party entitled to notice of hearing. G.S.
45-21.17(4). That does not include a subordinate lienholder. However, a subordinate
lienholder can record a “request for notice” in the register of deeds
office. G.S. 45-21.17A. If a request is not recorded by a subordinate
lienholder, North Carolina statutory law does not require that the notice
of sale be given to that lienholder. However, the Mennonite
Supreme Court case could very well mean that notice must be given to a
subordinate lienholder even in a situation where North Carolina statutory
law does not require it.
In The Federal Bank of Columbia v. Lackey, 94 N.C.App. 553, 380 S.E.2d
538 (1989), per curiam affirmed, 326 N.C. 478, 390 S.E.2d 138 (1990), the
N.C. Court of Appeals had before it a deficiency judgment case. Defendant
Lackey was apparently the original borrower (obligor under the note and
grantor of the deed of trust to the lender). He sold the land to Greer,
who assumed Lackey’s loan. However, in an assumption, Lackey remained
liable personally for the debt. Accordingly, G.S. 45-21.16(b)(2) expressly
required notice of hearing to be given to Lackey or Lackey could not be
held liable for a deficiency judgment. Lackey complained that he was not
properly served notice about the impending foreclosure hearing. Like the Mennonite
case, the defendant only received “constructive notice.” In the Mennonite
case it was notice published in a newspaper, while in the Lackey
case the notice was posted on the defendant’s property. The U.S. Supreme
Court in the Mennonite case
specifically found that “constructive notice” alone was not
sufficient. The Supreme Court, in the Mennonite
case, stated in part, “[W]hen the mortgagee is identified in a mortgage
that is publicly recorded, constructive notice by publication must be
supplemented by notice mailed to the mortgagee’s last known available
address, or by personal service.” The N.C. Court of Appeals agreed with
the U.S. Supreme court’s holding and in regard to the Lackey
case, stated in part “The evidence presented here shows that by the
posting of the property Lackey received only constructive notice of the
foreclosure hearing. However, constructive notice alone is not sufficient
to comply with minimum due process requirements.” The Court reversed and
remanded the case due to this insufficiency in notice. So, while Lackey
was a case involving the original borrower and was not a case involving a
subordinate lienholder, Lackey
very strongly endorsed the Mennonite
In Tower Development Partners v. Zell, et al, 120 N.C.App.136, 461
S.E.2d 17 (1995), the owners of a road easement entitled to notice of
hearing under G.S. 45-21.16(b)(3) did not receive notice. The N.C. Court
of Appeals held that their property interest in the form of an easement
was not extinguished by the foreclosure proceedings. Thus, Zell involved a party entitled to notice by the statutes.
We should mention Beneficial
Mortgage Company of North Carolina v. Nader Hamidpour, et al, __N.C.App.__,
574 S.E.2d 163 (2002), where a lender held a second lien deed of trust on
a parcel of real property that was sold at a foreclosure sale under a
prior deed of trust. The lender did not know of the sale and, therefore,
did not bid on the property. The lender was entitled to notice under G.S.
45-21.16 only if it filed a request for notice, which it did not. Because
the lender was not entitled to notice of sale, it had no standing to
dispute the adequacy of that notice on appeal. Moreover, because the
lender did not have standing to contest the adequacy of notice given, it
did not have standing to argue that the sale was held on a holiday in
contravention of G.S. 45-21.23. G.S. 41-10 allows a person with a claim or
interest in real property to bring an action to resolve that claim against
others who asserted rights or interest in the same real estate. However,
the lender was not attempting to resolve a situation where both it and the
purchaser had title to the same property. Rather, the lender was using G.S.
41-10 to make the same claim that it was making all along, and it did not
have standing to do so. There is nothing in the opinion to suggest that
the lender raised the Mennonite
issue since, while G.S. 45-21.16, G.S. 45-21.16(b)(3), G.S. 47-21.17(1)(a)
and (2), G.S. 45-21.17(4) and G.S. 45-21.17A were cited, Mennonite
was not. So Beneficial Mortgage
cannot be cited as convincing authority on the Mennonite issue.
Cases from other jurisdictions are of interest. Such
cases indicate that if a subordinate lienholder has the statutory
opportunity to request notice but does not request notice, the failure of
the subordinate lienholder to request notice does not constitute a waiver
of constitutional rights. Mennonite notice
must still be given. See, for example, Davis Oil Company v. Mills, 873 F.2d 774, 788 (5th Cir.
1989); 48 Louisiana L. Rev. 536, 585-586 (1988).
In further support of the preceding paragraph,
consider the following quote from Nelson and Whitman, Real
Estate Finance Law (Third Ed. Hornbook Series, 1994) §7.24, citations
The foregoing considerations probably also doom those statutes that provide for notice by mail or personal service both for the mortgagor and the owner, but for others only if they previously have recorded a request to receive it. Proponents of such legislation would, of course, argue that the relative sophistication of junior lienors as a class at least should be recognized in this context; after all, such parties can assure themselves of a constitutional form of notice merely by requesting it. On the other hand, it is also inescapable that under such legislation an interest [sic] party could be wiped out without being provided an [sic] notice “reasonably calculated to provide actual notice.” More important, however, the Mennonite majority not only “fashioned its rule from the view of the least sophisticated creditor[s]”, it also clearly refused to dilute 14th Amendment notice protections for their more sophisticated and powerful counterparts.
What valid purpose, then, does such a “request notice” statute serve? According to one court, such legislation “protects the due process rights of those parties whose interests and addresses are not ‘reasonably ascertainable,’ by providing a mechanism through which such parties can be assured that they will receive notice. If an interest of a party is reasonably ascertainable, however, the minimum requirements of due process dictate that actual notice be given without a formal request for notice being filed.” Thus, in the latter setting probably the only notice provisions that are clearly constitutional are those that closely approximate the notice provided to interested parties under judicial foreclosure: at least notice by mail to all parties who have a record interest in the foreclosed property junior to the mortgage being foreclosed. In the last analysis perhaps a finding of constitutionality is justified only as to this latter type of notice provision; whatever the arguments in favor of more limited notice, the cost and time involved in searching the title for those who have a record interest subsequent to the mortgage being foreclosed are minor.
It would seem that our foreclosure statutes may be in
need of amendment. Consider the following quote from the hornbook quoted
above, citations omitted:
The question remains to what extent a foreclosing mortgagee may remedy the problem of a constitutionally defective notice by providing more extensive notice to interested parties than the statute requires. (Emphasis added.) Logically, if such notice was provided to all interested parties, no person would have standing to challenge the foreclosure and the statute because no one would have suffered injury. Numerous decisions either hold or suggest that constitutional notice requirements were satisfied where the mortgagee supplied greater notice to the mortgagor than the power of sale statute required. Moreover, the court in Ricker v. United States emphasized the fact that the mortgagee did not attempt to notify the mortgagor other than by complying with the statutory requirement. The court implied that had the mortgagee made an effort to give actual notice, the foreclosure would not have been constitutionally defective on notice grounds.
cases, because of the United States Supreme Court’s decision in Wuchter
v. Pizzutti, there is still doubt that a foreclosing mortgagee has the
ability to conduct a constitutional power of sale foreclosure by supplying
necessary notice not required by the applicable statute.
Therefore, until the U.S. Supreme Court rules
otherwise, The Title Company of
North Carolina (TCNC) requires notice to be given to all known
subordinate lienholders subject to our comments about federal tax liens in
2. below. The foreclosure file must be documented to reflect the giving of
such notice. We require that notice be given in the form of a notice of
hearing under G.S. 45-21.16. The notice of hearing must be served pursuant
to G.S. 45-21.16(a) on the parties that the statute requires and
upon any subordinate lienholder not less than 10 days prior to the date of
such hearing. G.S. 45-21.17(4) provides that notice of hearing under G.S.
45-21.16 can satisfy the notice of sale requirements if the notice of
hearing meets the content requirements of a notice of sale under G.S.
45-21.16A. (We realize that certain people feel that Mennonite
notice can be deferred until notice of sale is given. However, we want
notice given at the notice of hearing stage and notice of sale should be
given to the subordinate lienholder 20 days prior to the date of the sale,
subject to what G.S. 45-21.17(4) allows.) This is consistent
with the position taken in E. Urban and G. Whitney, North
Carolina Real Estate §14-13 (Harrison Co.).
In certain situations it may be possible for
TCNC to make an underwriting decision to insure against the fact that no
notice is given to a subordinate lienholder. Passage of time without
objection by the second lienholder is helpful. Another reason would be the
fact that there is no equity in the property above the amount of the
foreclosed indebtedness and statutory foreclosure charges. Another reason
might be that the second lienholder is a defunct entity or an individual
who cannot be found.
If you have a case where the notice has not
been given to a subordinate lienholder and you are asked to insure title,
please call one of our attorneys for advice.
2. Federal tax
In our December 2000 newsletter, we included an
article entitled, Federal Tax Liens – Foreclosure of Deed of Trust And Subordinate
Federal Tax Liens, which has been scanned into our website at
www.oldrepublictitle.com/nc. That article contains a form of notice
suggested by the regulations. This article discusses the point that a
subordinate federal tax lien properly filed more than 30 days prior to the
foreclosure sale (pursuant to a superior deed of trust) requires that the
United States to be given a written notice by registered or certified mail
or by personal service not less than 25 days prior to the foreclosure
sale. In such a case, if notice is given, the federal tax lien would be
extinguished by the foreclosure sale. The United States will still have a
right to redeem for 120 days from the date of the foreclosure sale. 26
U.S.C. § 7425(b). If the federal tax lien is not properly filed more than
30 days before the date of the sale, the federal tax lien will be
discharged by the foreclosure sale even though no notice was given to the
United States. If the United States is not entitled to notice, it has no
right to redeem.
As indicated by the last paragraph, there are certain
situations in which the United States is not entitled to notice. That is
because of 26 U.S.C. § 7425(b)(2) which states that a foreclosure sale:
[S]hall have the same effect with respect to the discharge or divestment of such lien or such title of the United States, as may be provided with respect to such matters by the local law of the place where such property is situated, if—
(A) notice of such lien or such title was not filed or recorded in the place provided by law for such filing more than 30 days before such sale,
(B) the law makes no provisions for such filing, or
notice of such sale is given in the manner prescribed in subsection
So, it would seem that, due to 26 U.S.C. §
7425(b)(2), a federal law that preempts state law, no Mennonite
notice need be given to the United States in circumstances where the
United States is not entitled to notice under 26 U.S.C. § 7425(b). That
is because 26 U.S.C. § 7425(b) refers to the “same
effect…as…provided…by local law…” The quoted language does not
seem to engraft a Mennonite rule
upon North Carolina foreclosure law, but instead, seems to codify
proceeding exactly in accord with North Carolina foreclosure law modified
only to the specific extent outlined in 26 U.S.C. § 7425(b).
money deeds of trust – a special case.
As discussed in our November, 2002 newsletter,
entitled “Federal Tax Liens vs. Purchase Money Deeds of Trust,”
available at www.oldrepublictitle.com/nc, if a judgment is docketed by J
against A and subsequently, X
conveys Lot 1 to A and A
gives a deed of trust on Lot 1 securing M to secure all or part of the purchase money, and the deed and
deed of trust are recorded as part of one simultaneous transaction as
discussed in that newsletter, M’s deed of trust will have priority over J’s judgment.
If the judgment is known to the foreclosing attorney, the judgment
would be a subordinate lien and the Mennonite rule discussed in 1.
above would apply. If instead
of J’s judgment lien, the
lien was a federal tax lien, the “purchase money rule” should be
deemed to apply making the federal tax lien subordinate to the deed of
trust and subject to notice requirements under 26 U.S.C. §7425(b),
discussed in 2. above, since it
would have been filed more than 30 days prior to the sale.
As the November, 2002 article indicates, the application of the
“purchase money rule” to federal tax liens is assumed and we rely upon
it, but that reliance is questionable.
NOTARIES – CURATIVE STATUTE
G.S. 10A-16 is a curative statute that validates certain errors in a notary’s work. By recent amendment, G.S. 10A-16(d) states that it applies to notarial acts performed on or before March 1, 2003.