A Tale of Two (Simultaneous) Foreclosures and the Importance of Being Locatable

(With Apologies and Deference to Charles Dickens and Oscar Wilde)

Every so often, a North Carolina appellate court will issue an opinion that is useful to the mortgage servicing industry not so much for its substantive holding but for the practical guidance that may be gleaned from its dicta.  One such case is In re: Foreclosure of Real Property Under Deed of Trust From Garrett, 795 S.E.2d 1 (N.C. Ct. App. 2016) which involved the following relevant facts:  

In 2000, Mr. and Mrs. Garrett executed a note in favor of Household Realty Corporation secured by a deed of trust on the Garretts’ property located in a planned community in Charlotte.  The community had a homeowners association (HOA) which, in 2010, filed a claim of lien on the property and initiated a proceeding to foreclose that HOA lien after the Garretts failed to pay their HOA dues (First HOA Foreclosure).  The HOA purchased the property at the sale of the First HOA Foreclosure for about $2,500 subject to the mortgage of Household.  For reasons which are unclear to this author, Household then paid the past-due assessments to the HOA which then conveyed the property to Household by non-warranty deed in 2011.  Importantly, that deed designated Household as the grantee as follows:

Household Realty Corporation | c/o HSBC Bank USA | 2929 Walden Avenue | Erie, NY 14043

Now Household owned the property and was responsible for paying HOA dues going forward.  Except that Household apparently did not pay those HOA dues.  So, in 2013, the HOA filed another claim of lien on the property and initiated another proceeding to foreclose the HOA lien (Second HOA Foreclosure).  The HOA “served” the new property owner, Household, with notice of the Second HOA Foreclosure at two address: (1) the property address in Charlotte which was now a vacant house where Household clearly never had a corporate presence; and (2) the Erie, New York address identified in the aforementioned deed, which was actually an address for HSBC Bank’s records department and apparently not the office of a Household officer, director or managing agent.  Notably, the HOA did not even attempt to serve the notice of the Second HOA Foreclosure to either Household’s principal office address in Illinois or its registered agent address in North Carolina, both of which addresses were conspicuously disclosed in Household’s corporate filings with the North Carolina Secretary of State.  

A third party, Universal Funding, Inc. (Universal), purchased the property at the sale of the Second HOA Foreclosure for $2,400 and later conveyed the property by Deed to Select Transportation Services, LLC (STS).  

Before Universal conveyed the property to STS, however, Household (apparently totally unaware of the Second HOA Foreclosure) initiated a separate foreclosure proceeding on its deed of trust (“Household Foreclosure”) but did not serve STS.  A sale was held in the Household Foreclosure in September 2013 whereupon Household was the high bidder.  In March 2014, the substitute trustee in the Household Foreclosure conveyed the property to Household by Trustee’s Deed.  

A dispute then ensued between STS and Household, both of which believed they were the rightful owner of the property.  STS, believing it was the rightful owner of the property via the Second HOA Foreclosure, filed a motion to set aside and vacate the Household Foreclosure.  Then, Household, believing it was the rightful owner of the property via the Household Foreclosure, filed a motion to set aside and vacate the Second HOA Foreclosure.  The trial court granted STS’s motion to set aside and vacate the Household Foreclosure and denied Household’s motion to set aside and vacate the Second HOA Foreclosure.  Household appealed.

On appeal, Household contended that service upon it in the Second HOA Foreclosure (to the property address and to the Erie, New York address) was invalid thus rendering the Second HOA Foreclosure sale void.  Put another way, Household contended that it was improper for the HOA to serve it at the property address and the Erie, New York address because Household had none of its officers, directors, or managing agents located at those addresses.  However, the appellate court disagreed finding that “it is not clear that service to the New York address was not proper service upon an ‘officer, director, or managing agent’ given that [the] HOA was instructed to send the deed conveying the property to Household to the New York address, and the New York address was used to provide notice to Household on other occasions.” 

The lesson to be learned here is this:  Even though mortgage lenders and their servicers may have registered addresses of record showing where they can be served with process in legal actions, they should nonetheless establish and maintain proper procedures to assure that legal notices and pleadings sent to other addresses are forwarded to their proper destination and dealt with swiftly.