Issue 3

Fall 1998

A PUBLICATION OR THE TITLE COMPANY OF NORTH CAROLINA

     

1.                  General comments; priority under North Carolina statutes

 

A mortgage or deed of trust (usually a deed of trust) securing an “equity line of credit” as defined in G.S. 45-81(a) can have the priority set out in G.S. 45-82.  (For the sake of brevity, we will refer to deeds of trust, but the comments herein pertain to mortgages as well.)  In order for the priority rule in G.S. 45-82 to apply, the deed of trust must show “on its face that it secures an equity line of credit” governed by Article 9 of Chapter 45.  G.S. 45-81(a)(3) and G.S. 45-82.  The deed of trust must also set forth the maximum principal amount, which may be secured at any one time.  G.S. 45-81(a)(3).  G.S. 45-81 makes it clear that the equity line of credit agreement which sets out the requirements for a loan governed by Article 9 need not be part of the deed of trust or recorded.  The agreement must provide that the “lender is obligated” to make advances.  That term is defined in G.S. 45-91(b).  That term means that the lender is contractually bound to provide advances.  The agreement or contract must set forth events of default by the borrower, or other events not within the lender’s control, which may relieve the lender from its obligation, and must state whether the lender has reserved the right to cancel or terminate the obligation.

Therefore, if the agreement is in place, and G.S. 45-82’s priority rule applies, strong lender favored priority results.  Pursuant to G.S. 45-82, the deed of trust shall, from the time of its registration, “have the same priority to the extent of all advances secured by it as if the advances had been made at the time of the execution of….the deed of trust.”  (Emphasis added.)  This rule of priority, combined with the definition of “lender is obligated” in G.S. 45-81(b), means that if an advance is made within the period in the “equity line of credit” agreement (which initially cannot exceed 30 years) and does not result in the outstanding principal balance exceeding the maximum principal amount that can be secured at any one time (as set out in the deed of trust), the advance will have priority as of the registration of the deed of trust even if the lender was not obligated to make the advance at the time the lender made it, having been relieved of its obligation by reason of the borrower’s default or the other occurrence or non occurrence of an even not within the lender’s control.  In other words, while initially the equity line of credit agreement must provide that the “lender is obligated” as defined by G.S. 45-81(b), the lender need not remain obligated.  This will allow, for example, an advance to have priority over a judgment docketed against the owner-borrower after recordation of the deed of trust but prior to the making of the advance.  The same would be true of a person furnishing labor, services, materials or equipment within that period.

The second sentence of G.S. 45-82 confers such priority upon advances made for insurance, taxes and assessments “and other payment made by the lender pursuant to the deed of trust” even if the maximum principal balance is exceeded.

G.S. 45-82.1, made effective October 1, 1995, provides for the filing and recording of a certificate of extension executed by the owner-borrower and lender.  This can lengthen the period for making advances.  The deed of trust will only have priority from the time of recording of the certificate as to advances made after the prior period but during the extension.  G.S. 45-82.1(b) and (c).

Article 9 allows fluctuations of the outstanding principal balance within the specified maximum principal outstanding balance.  G.S. 45-81(a)(2); G.S. 45-81(c) and G.S. 45-82.  G.S. 45-81(c) provides a rule, which impacts upon extinguishing and canceling a prior equity line deed of trust.  Failure to follow that procedure can result in the prior deed of trust remaining effective and securing subsequent advances thereunder with priority pursuant to G.S. 45-82.  Pursuant to G.S. 45-81(c), if the balance of the equity line is reduced to zero, the lender shall, upon written request of the borrower, make written entry upon the deed of trust showing full payment and satisfaction of the deed of trust.  However, absent (1) such a reduction of the secured balance to zero or (2) such a request from the borrower, the deed of trust remains in effect, as was the case in Raintree Realty & Constr. Inc. v. Kasey, 116 N.C. App. 340, 447 S.E.2d 823 (1994), aff’d, 341 N.C. 195, 459, S.E.2d 273 (1995).  Therefore, a careful statutory procedure for pay-off of the prior equity line indebtedness must be followed.  If that is done, the title insurer can insure a new deed of trust without excepting to the prior equity line deed of trust even though its cancellations of record pursuant to G.S. 45-37 takes place after the new transaction’s closing.

2.     Federal tax liens – special problems

A federal tax lien presents a serious problem.  This is because a federal statute controls and does not confer the same priority as does G.S. 45-82.  If a deed of trust complies with Article 9’s requirements and advances are made within the period and within the maximum principal amount as discussed above, the priority of advances against a filed federal tax lien can be illustrated by the following time line: 

  •      Deed of trust recorded on January 15, 1998

    • Advance No. 1 made

  •        Federal tax lien filed on June 1, 1998

    • Advance No. 2 made without actual notice or knowledge of tax lien

    • Advance No. 3 made with actual notice or knowledge of tax lien

  • 46th day after tax lien’s filing

    • Advance No. 4 made

The result in the above example is that advances Nos. 1 and 2 have priority over the filed federal tax lien but advances Nos. 3 and 4 do not.  An advance made at the time of advance No. 4 is subordinate to the federal tax lien regardless of the lender’s actual notice or knowledge of the lien.  These rules are set out in 26 U.S.C. Sec. 6323(d).  Other priority rules pertaining to real property construction or improvement situations, obligatory disbursement agreements and other arrangements do not apply to the typical equity line deed of trust.  See 26 U.S.C. Section 6323(c).

It should be noted that interest and foreclosure costs are accorded the same priority as the advance.  26 U.S.C. Sec. 6323(e).

The above rules mean that, for these types of advances, a title update should be performed even if state law or a title insurer does not require one.

3.     Title insurance policy considerations 

A title insurance policy excludes priority coverage for liens (other than liens for labor, services and materials) attaching or created subsequent to the Date of Policy.  See, for example, ALTA Loan Policy (1992), Exclusions From Coverage, par. 3(d).  The Date of Policy initially corresponds to the date and time of recording of the insured deed of trust.  Also, paragraph 8(d) of the above cited Loan policy’s Conditions and Stipulations excludes liability for “any indebtedness created subsequent to the Date of Policy except for advances made to protect the lien of the insured [deed of trust] and secured thereby and reasonable amounts expended to prevent deterioration of improvements…”  Paragraph 8(d) excludes liability for an advance made subsequent to Date of Policy.  A routine “pending disbursement provision” corrects problems with paragraph 8(d) but does not provide priority coverage against a lien filed subsequent to the Date of Policy and excluded by par.3(d) cited above.  Therefore, a revolving credit endorsement is recommended.  E. Urban, North Carolina Real Property Mechanic’s Liens, Future Advances, And Equity Lines – Including Title Insurance, Sections 49-12 through 49-15 (Harrison Co. 1998), contains a discussion and suggested forms.  Certain forms not only correct the problem with paragraph 8(d) but also provide that advances made pursuant to the deed of trust will have the same priority as if made when the deed of trust was recorded.  Typically, federal tax liens are excluded.  However, the title insurer, upon request, can limit the exclusion to a federal tax lien having priority under applicable federal statutes.

Please let us know if the Title Company of North Carolina can be of assistance. 

WITH RESPECT TO MECHANICS’ LIENS, DID YOU KNOW THAT…

1.     A voluntary dismissal without prejudice of the action of lien enforcement allows the refiling of the action subsequent to the 180 day lien enforcement period in G.S. 44A-13 if the action is refiled within one year of the dismissal unless a stipulation of dismissal specifies a shorter time.  See Newberry Metal Masters Fabricators, Inc. v. Mitek Industries, Inc., 333 N.C. 250, 424 S.E.2d 383(1993).

2.     If the judgment of lien enforcement complies with the content requirements of G.S. 44A-13(b), the judgement will be a Chapter 44A lien upon the property improved with priority as of the claimant’s first furnishing and a general judgement lien upon all other property of the owner-defendant with priority from the time of docketing only.

3.     If a judgement of lien enforcement does not comply with the content requirements of G.S. 44A-13(b), it constitutes a general judgment lien only, with priority from the time of docketing, as to all of the owner-defendant’s real property.  Miller v. Lemon Tree Inn of Roanoke Rapids, 32 N.C. App. 524, 233 S.E.2d 69(1977).

4.     While a claim of lien can be “bonded off” pursuant to G.S. 44A-16, a docketed judgement cannot be.

 

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