Issue 1

Fall 1997

A PUBLICATION OR THE TITLE COMPANY OF NORTH CAROLINA

 

The topics discussed in this inaugural issue of the TCNC Newsletter are intended to assist you in your practice.  They were selected from inquiries received in our offices around the state.  We intend to publish on a regular basis and we invite your comments on these articles, as well as your input on future articles.  As you know, The Title Company of North Carolina maintains a strong commitment to the traditional delivery of real estate services in North Carolina and is dedicated to preserving the role of the independent attorney in real property transactions.  We trust this publication will be beneficial.

ALTON RUSSELL, President

     

EASEMENTS – ZELL, CREATION OF EASEMENTS AND STATUTORY REVISION

 In Tower Development Partners v. Zell, 120 N.C. App. 136, 461 S.E.2d 17 (1995), the Court of Appeals held that an owner could not create an easement burdening one of the owner’s tracts for the benefit of another of the owner’s tracts.  The case is discussed in some detail in E. Rast, Tower Development Partners v. Zell: Death of the Declaration of Easements? 17 Real Property No. 2 (Real Prop. Sec. Newsletter, April 1996).

In view of Zell and prior to the new statute mentioned below, certain attorneys believed that a subsequent deed should incorporate by reference the document rendered questionable by Zell and reiterate a grant of easement(s) as outlined in the questionable document.  As Mr. Rast points out in his excellent article, there were uncertainties, however.

G.S. 39-6.4 has been enacted.  It reads as follows:

Sec. 39-6.4.  Creation of easements, restrictions and conditions.

(a)     The holder of legal or equitable title of an interest in real property may create, grant, reserve, or declare valid

easements, restrictions, or conditions of record burdening or benefiting the same interest in real property.

(b)     Subsection (a) of this section shall not affect the application of the doctrine of merger after the severance and subsequent reunification of title to all the benefited or burdened real property of interests therein.

G.S. 39-6.4(a) overrules Zell and G.S. 39-6.4(b) preserves the doctrine of subsequent merger.  Restrictions were included because restrictions are negative easements.

The session laws make the statute effective October 1, 1997.  The act applies to all easements, restrictions, conditions or interests created, granted, reserved or declared before, on, or after October 1, 1997.  However, the act does not apply to litigation pending on October 1, 1997, or to any instrument directly or indirectly involved in litigation pending on that date.  The act does not apply to any litigation in which a final judgement has been rendered or to any instrument directly or indirectly involved in litigation in which final judgment has been rendered, on or before that date.

 

BANKRUPTCY – EFFECT OF DISCHARGE ON LIENS

Bankruptcy law presents certain problems when trying to assess the effect of a discharge in bankruptcy upon certain liens.  Therefore, perhaps a summary of what appears to be the law will be helpful.

 1.        Pre-Petition Lien Attaching to Land Prior to Petition.

A discharge in bankruptcy, which includes a discharge of personal obligation to pay a particular debt, does not discharge or remove the lien securing the debt to the extent the lien constituted a lien upon the debtor’s land prior to the filing of the bankruptcy petition.  11 U.S.C. Sections 524(a)(1) and (2) refer only to the determination of personal liability of the debtor with respect to any debt discharged.  See In Re Perry, 25 B.R. 817 (Bankr, Md. 1982); and Ducker v. Standard Supply Co., 280 S.C. 157, 311 S.E.2d 728 (1984) (construing a statute similar to G.S. 1-245).  After discharge, a lien creditor retains his pre-petition lien on property owned prior to he petition unless the lien is avoided by a proceeding under the Bankruptcy Act, even if the lien creditor does not file a proof of claim.  See, generally, E. Urban and G. Whitney, North Carolina Real Estate, Sec. 16-41 (Harrison Co. 1996).

In certain cases, bankruptcy plans and other procedures can avoid liens.  A subsequent article will discuss lien avoidance. 

G.S. 1-245 cannot be used to discharge such a lien merely because the underlying personal obligation to pay the debt has been discharged.  See the discussion in Clowney v. NCNB, 19BR, 349 (Bankr. M.D.N.C. 1982).

2.        Pre-Petition Lien and Land Acquired After Petition is Filed.

A pre-petition lien does not attach to land acquired by the debtor after the filing of the petition if the debt secured by the lien is discharged.  11 U.S.C. Sec. 524, entitled, “Effect of Discharge,” does not expressly state this, but cases have so held.  Clowney v. NCNB, 19 B.R. 349 (M.D.N.C 1982); E. Urban and G. Whitney, North Carolina Real Estate, Sec 16-40 (1996).  Regarding land acquired after the filing of the petition or commencement of the case but prior to discharge, it would seem that 11 U.S.C. Sec. 362(a)(5) precludes lien attachment prior to discharge.  See 3 Collier on Bankruptcy, PAR. 362,03(7); In Re Fuller, 134 B.R. 945 (Bankr. 9th CIR 1992).

A discharge is obtained under 11 U.S.C. Sections 727, 1141, 1228(a), 1228(b), or 1328(b), depending on the applicable Bankruptcy Act chapter.  In a Chapter 7 proceeding, only and individual debtor may obtain a discharge.  11 U.S.C. Sec, 727(a)(1).  11 U.S.C. Sec 523 sets out exceptions to discharge.  For example, 11 U.S.C. Sec. 523(a), in conjunction with its reference to 11 U.S.C. Sec 507(a)(8), provides that many income tax and other tax liabilities will not be discharged.  Certain indebtedness, specified in 11 U.S.C. Sections 523(a)(2), (4), and (6), created by fraud, false pretenses or willful or malicious conduct, which are ordinarily not dischargeable, will be discharged unless, on request of the creditor, and after “notice and a hearing,” the court determines that the debt is excepted from discharge.  11 U.S.C. Sec. 523(c).  11U.S.C. Sec. 523(c) makes an exception for what is provided in 11 U.S.C. Sec. 523(a)(3)(B). That statute excepts from discharge a debt neither listed nor scheduled in time to permit a debt of the kind specified in 11 U.S.C. Sections 523(a)(2), (4) or (6) to be claimed by the timely filing of a proof of claim and timely request for a determination of dischargeability, unless the creditor had notice or actual knowledge of the case in time for such timely filing and request.

The form of discharge (Official Form No. 18) states that the debtor is “released from all dischargeable debts” and that any judgment “heretofore or hereafter obtained” is null and void “as a determination of the personal liability” of the debtor with respect to: (1) dischargeable debts under 11 U.S.C. Sec. 528; (2) unless “heretofore or hereafter” determined by order of the bankruptcy court to be non-dischargeable, debts alleged to be excepted from discharge under 11 U.S.C. Sections 523(a)(2), (4), (6) and (15); and (3) debts determined by the court to be discharged.  The form goes on to make it clear that the discharge is an injunction against pursuit of personal liability of the debtor.  Bankruptcy Rule 5003 requires the clerk to keep a bankruptcy docket which should show entry of the discharge, if any.  A certified copy of the order of discharge can be entered tin other districts.  Bankruptcy Rule 4004(f).  Rule 4004 governs discharge procedure.  Rule 4007 governs determination of dischargeablity of a debt.

Therefore, in order to waive a pre-petition lien in connection with land acquired after the filing of the petition, it must be verified that the discharge was entered and that the personal obligation for the debt was in fact discharged.  In such a case, G.S. 1-245 can be used to enter a notation on the margin of the judgment, although that is not necessary.  See the discussion in Clowney v. NCNB, 19 B.R. 349 (Bankr. M.D.N.C. 1982).

It should be noted that 11 U.S.C. Sec 727(e) allows a Chapter 7 discharge to be revoked within one year after its granting or, in certain cases, before the later of one year after the granting of statute does not contain 11 U.S.C. Sec. 1144’s protective provisions mentioned below.  11 U.S.C. Sec. 1144 provides that the discharge can be revoked if procured by fraud, if revoked within 190 days after date of entry of order of confirmation of a Chapter 11 plan and if the order of revocation contains provisions protecting parties relying upon the discharge.  11 U.S.C. Sec. 1328(e) places a one-year period on revocation for fraud but does not contain 11 U.S.C. Sec. 1144’s protective provisions.  11 U.S.C. Sec. 1228(d) contains similar revocation provisions.  Your title insurer should be consulted to see to what extent it will rely upon a discharge prior to expiration of the revocation period.

TITLE INSURANCE – CONTINUATION OF COVERAGE AFTER FORECLOSURE OR DEED IN LIEU

When an insured deed of trust is foreclosed and the insured lender acquires title at foreclosure, the policy coverage continues in force as of “Date of Policy.” ALTA Loan Policy (10/17/92), Conditions and Stipulations, PAR. 2(a).  The Date of Policy usually corresponds to the time of the deed of trust’s recordation, or, at the latest (due to an endorsement), a point in time prior to foreclosure.  This means that the insured will not have coverage for (1) post-Date of Policy defects in the foreclosure procedure or (2) post-Date of Policy liens excluded by paragraph 3(d) of the policy’s Exclusions From Coverage. 

Also, it has been held that, under a loan policy, there is no compensable loss or damage for a defect, lien or encumbrance not excepted from coverage if the insured lender recovers all of its principal, interest and foreclosure costs (secured by the deed of trust) or the value thereof as a result of the foreclosure sale.  CMEI, Inc. v. American Title Ins. Co., 447 So.2d 427 (Fla. 5th DCA 1984), discussed in detail in E. Urban, North Carolina Real Property Mechanics’ Liens and Future Advances – Including Title Insurance, Sec. 48-9 (Harrison Co. 1989, Supp. 1993).  See recent North Carolina case of Marble Bank v. Commonwealth Land Title Ins. Co., 914 F.Supp. 1252 (E.D.N.C. 1996), a case dealing with mechanics’ liens.  This distinguishes a loan policy from an owner’s policy.

The above reasons are excellent justification for obtaining a new owner’s policy insuring the lender with a Date of Policy corresponding to the time of recording of the trustee’s foreclosure deed to the insured. 

These principles apply to PAR. 2(a)’s conniption of coverage in the event of a deed in lieu of foreclosure. 

A foreclosure purchaser other than the insured does not obtain the benefit of continuation of coverage. 

 If after acquisition of title by foreclosure or deed in lieu thereof, the insured conveys title but has warranty liability or holds a purchase money deed of trust from the purchaser, Conditions and Stipulations, PAR. 2(b) provides once again for continuation of coverage for the insured lender as of the Date of Policy with the above discussed limitations.

 

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