Issue 4

Summer 1998

A PUBLICATION OR THE TITLE COMPANY OF NORTH CAROLINA

     

MECHANICS' LIENS:  MATERIAL SUPPLIER IS ALSO CONSTRUCTION LENDER - WHAT NEXT?

1.     An Important Case Goes Unpublished

The unpublished Court of Appeals opinion of Carolina Builders Corporation v. The Alexander Scott Group, et al (Wake County No. 94CVS6334, C.A. No. COA 96-442, filed March 4, 1997) should be noted. Carolina Builders Corporation (CBC) functioned as a construction financing lender and a building material supplier in the same transaction, agreeing to lend money only to owner-builders who agreed to purchase building materials from CBC on an open account with CBC as material supplier, with funds advanced by CBC, as lender. CBC took a note and a recorded deed of trust on each individual property to secure its position as construction lender. The Alexander Scott Group, Ltd. (referred to as "ASH" in the opinion) agreed to be such an owner-builder. During the fall of 1993, ASH was unable to sell its houses for an amount sufficient to cover costs expended during construction.

When ASH sold the houses to individual defendant consumers, the closing attorney involved represented ASH and the individual defendants. The closing attorney would contact Mr. Casey of CBC's "Construction Loan Financing Department" requesting a construction loan payoff for the particular house. The closing attorney did not inquire into whether or not additional amounts were owed by ASH to CBC even though the closing attorney knew of the open account arrangement. The closing attorney relied upon lien affidavits signed by ASH falsely stating that ASH had paid all laborers and material men. It was alleged that Mr. Casey had no direct knowledge of or responsibility for the amounts owed to CBC for labor and materials supplied on the open account to ASH.

At each closing, ASH paid the amount secured, by CBC's construction loan but not the amounts owed to CBC for labor and materials or amounts owed to other creditors. The defendant homeowners purchased individual lots, the defendant lender made loans secured by deeds of trust on those lots and the defendant Investors Title issued owners' and loan policies. When CBC filed its claims of lien against the lots, the date of first furnishing on each lot predated the date of recordation of the deed of trust on that lot.

The defendants relied upon the doctrine of "equitable estoppel," discussed in the opinion as follows:

"In order to successfully rely upon the doctrine of equitable estoppel, a party must show that the party sought to be estopped: (1) misrepresented or concealed material facts: (2) intended that such misrepresentation or concealment be acted upon by the other party; and (3) had knowledge, actual or constructive, of the facts. Syro Steel Co. v. Hubbell Highway Signs, Inc., 108 N.C. App. 529, 532, 424 S.E 2d 208, 210 (1993). Further, the party asserting estoppel must have a lack of knowledge and the means to acquire knowledge as to the facts in question, and must have relied to his detriment upon the conduct of the party sought to be estopped."

The court found that the first element was missing because Mr. Casey, for CBC, responded to all closing attorney inquiries about the payoff figure for the CBC construction loans with ASH "and that the closing attorney never asked [CBC] about open account balances owed to [CBC] by defendant ASH." (Emphasis Added.) Instead, he relied upon lien affidavits. Further, the closing attorney's knowledge of CBC's open account was imputed to the defendant owners and so, certain of the parties asserting estoppel could not be found to be without knowledge of the open account. (The opinion does not clearly discuss the issue of the closing attorneys representation of the defendant lenders.) In addition, citing authority, the court stated that since CBC perfected its lien in accordance with Chapter 44A, the equitable estoppel claim was properly denied.

In addition, the court held that CBC, the plaintiff-material supplier, was a third party beneficiary of the Investors Title owners' policies because the policies stated that such liens were within the policy coverage.

Finally, the court held that there was no evidence that each defendant lender intended to be subrogated to the priority position of CBC's construction loan deed of trust as against the CBC claim of lien on the lot, citing Peek v. Wachovia Bank & Trust Co., 242, N.C.1, 86 S.E.2d 745 (1955).

It should be noted that, in certain cases involving a construction lender who is also a material supplier, the purchase price of the completed improvements and lot might not be enough to payoff all outstanding liens. This can present a situation where certain indebtedness information will not be volunteered by the construction lender/supplier, or sort of a "don't ask, don't tell" policy.

2. Underwriting Practices            

WHERE ANY BUILDING SUPPLY COMPANY OR ANY PERSON OR ENTITY THAT APPEARS TO BE A PERSON OR ENTITY THAT FURNISHES LABOR, MATERIAL, SERVICES OR EQUIPMENT PURSUANT TO CHAPTER 44A OF THE GENERAL STATUTES, HOLDS A MORTGAGE OR DEED OF TRUST UPON LAND TO BE INSURED, THE CLOSING ATTORNEY MUST OBTAIN WAIVER OF ALL LIEN RIGHTS PURSUANT TO LAW FROM THAT HOLDER IN ADDITION TO CONSTRUCTION LOAN OR OTHER LOANPAYOFF INFORMATION AND DEED OF OR MORTGAGE CANCELLATION.

A title insurance commitment requirement in accord with the above will be inserted when we believe the title opinion warrants it.

The approved attorney and title insurer will have to be more vigilant than ever to guard against the above construction industry practice taking place under the "relation back" rule of priority in G.S. 44A-10.  

 

MOBILE HOMES, MANUFACTURED HOUSING UNITS AND MODULAR HOMES

I. Restrictive covenant considerations in preparing the title insurance opinion

A threshold question that must be answered is, does the placement on the land of the mobile home, manufactured housing unit or modular home (hereinafter, "the unit") violate applicable restrictive covenants? There are several cases of interest: Starr v. Thompson, 96 N.C. App. 369, 385 S.E.2d 535 (1989); Forest Oaks Homeowners' Ass'n of Lincoln Co.  v. Isenhour, 102 N.C. App. 322, 401 S.E.2d 860 (1991); Angel v. Truitt, 108 N.C. App. 679, 424 S.E.2d 660 (1993); Young v. Lomax, 122 N.C. App. 385, 470 S.E.2d 80 (1996); and most recently, Briggs v. Rankin. 491 S.E.2d 234 (N.C. App. 1997).

In Starr, the court held that a factory-built modular home constituted a mobile home within the prohibition of restrictive covenants prohibiting mobile homes. This was in spite of the fact that the axles, wheels and tongues were removed after the home was placed on the land. Isenhour distinguished Starr on the basis that in Isenhour, the covenants permitted modular homes while prohibiting mobile houses. In Young, the structure was found to be a prohibited mobile home because it was designed for transport, notwithstanding that it was subsequently rendered immobile and placed on piers. In Angel, the unit was not a mobile home since it was placed on a foundation and could only be moved in the manner in which a house built on-site could be moved.

In Briggs, the covenants provided that "No structure of a temporary character, trailer...or any other outbuilding shall be inhabited, located or used upon any building...lot at any time as a residence, either temporarily or permanently."

The Court of Appeals noted that even though the owner chose an optional steel framed structure, this did not change the character of the unit even though this did determine available methods of delivering the unit to the lot. The owners could choose to have the units lifted onto a dolly or to have a tongue and axles attached to save expenses. The latter method was chosen. The unit was attached to a permanent foundation, a deck and covered porch were attached and a three-car garage was built upon a permanent foundation and connected to the unit by a breezeway. A building permit was obtained prior to installation. Periodic inspections were conducted during the installation and construction. The unit's placement on the land complied with the North Carolina State Building Code. The Court observed that since the unit was attached to a permanent foundation, it could only be moved in the same way as a site-built home. Title was transferred by a bill of sale and no certificate of origin was ever issued.

Therefore, the court found that the restrictions were not violated.

The Court of Appeals listed several factors differentiating "modular homes" from "trailers" or "mobile homes";

(1)             How the unit is moved to the lot;

(2)             Whether the unit must comply with the N.C. 

          Regulations for  Manufactured / Mobile Homes or with the applicable building code;

(3)              Whether the unit is attached to a permanent foundation;

(4)              Whether the completed unit can be easily moved, or has to be moved like a site-built home; and

(5)              Whether the title to the unit is registered with the N.C. Department of Motor Vehicles or title is conveyed by deed.

Apparently, no single factor is determinative. Obviously, factor (1) is not as important as the other factors. This area of the law should be clarified by legislation.

II. Insurability of title

The Title Company's view on the applicability of restrictive covenants and the insurability of the unit as part of the land is as follows.

A. Restrictive covenants

Regarding restrictions, a case within the facts of Briggs presents no problems. Other situations will be considered on a case-by-case basis.

B. Issues other than application of restrictive covenants

1.      The unit must be permanently affixed (within the Briggs guidelines) to a permanent foundation constructed on the land with all wheels, tongues, axles and other items for transportation of the unit removed.

2.      Any outstanding certificate of origin must be destroyed and any outstanding certificate of title must be cancelled, with any lien thereon being noted as being satisfied on the certificate. The owner should then send the certificate of title, along with a short cover letter, to: Registration Section, Division of Motor Vehicles, 1100 new Bern Avenue, Raleigh, North Carolina 27697, Phone (919) 733.3025. Where the certificate of title is lost, the DMV requires that a replacement certificate of title be issued to the owner, and then cancelled for treatment of the unit as real property.

3.      As soon as possible (usually after closing), the unit and land as a parcel of real property must be listed for taxes as real property. See G.S. 105-273(13). Outstanding personal property taxes must be paid since those can constitute a lien on real property. G.S. 105-355; G.S. 105-356.

4.      It is helpful, but not required, for there to be a recital in the deed and deed of trust in the transaction to be insured that the land and unit constitute one parcel of real property. An affidavit of intent for the unit to constitute part of the land in accord with the above is helpful.

5.      If the unit is affixed to the land so as to constitute real property in North Carolina, the unit will be covered as part of the "land" insured by a title insurance policy. See paragraph 1(d) of the Conditions and Stipulations of the ALTA policies, defining the term "land." Issuance of the ALTA Endorsement Form 7 can confirm that the unit is insured as part of the insured land, since the endorsement states that: "The term 'land' as defined in this policy includes the manufactured housing unit located on the land at Date of Policy."

6.      Be sure to check closing instructions to see if the lender wants the unit to be considered as part of the land or if the lender wants the unit to remain and be considered personal property. If the latter is true, we will except to the title to the writ and any lien against the unit. If there is any ambiguity in the lender's instructions, the lender should be consulted in advance of closing.

7.   Our title insurance commitments will contain a requirement in accord with the above when we are aware that a unit is involved.    

 

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