The Rules of Civil Procedure Do Not Apply to NC Foreclosures

The “Lucks” Stop Here: The Rules of Civil Procedure Do Not Apply to NC Foreclosures

The North Carolina Supreme Court issued a landmark decision in the case of In re Foreclosure of Lucks, No. 162A16 (December 21, 2016). The Court’s opinion definitively states that the Rules of Civil Procedure do NOT apply to North Carolina power of sale foreclosures and ends a torrent of recent litigation that sought to convert North Carolina’s streamlined, contractual procedure into full-blown litigation.

In Lucks, the trial judge dismissed a non-judicial foreclosure proceeding “with prejudice” after sustaining the borrower’s objection to the admission of an instrument granting the servicer power-of-attorney to appoint the substitute trustee on the holder’s behalf. On appeal, the Court of Appeals reversed the trial judge in a divided opinion. The majority held that the Rules of Evidence are “relaxed” in a non-judicial foreclosure proceeding and the power-of-attorney should have been admitted. The dissent pointed out there was no basis in precedent for the majority’s view that the Rules of Evidence should be relaxed and the document should not have been admitted. As a result of the divided Appellate Court, the borrower exercised his appeal as a matter of right to the Supreme Court.

While these facts would appear to lead to a discussion of the Rules of Evidence, the Supreme Court seized this opportunity to silence the chorus from consumer attorneys seeking to convert the contractual remedy of the power of sale foreclosure into a formal lawsuit. The Court did agree with the trial judge’s refusal to admit the power-of-attorney, but the Court found error in his dismissal of the foreclosure “with prejudice”. The Court outlined the contractual nature of the power of sale, ratified its streamlined nature, and found that the Rules of Civil Procedure do not apply.  The Court then went on to discuss the nature of foreclosure rulings against the creditor, finding that the legal concepts of “res judicata” and “collateral estoppel” (e.g., you can’t re-litigate what you’ve already lost) did not prevent the creditor from filing a formal civil action seeking judicial foreclosure or bar a later power of sale foreclosure action on a different default, such as the failure to make payments after the adverse ruling.  

Although the Court’s opinion served as a pyrrhic victory for the lender in the instant case (the foreclosure remained dismissed), lenders can now take solace that prior adverse decisions in foreclosure cases no longer cut off the lender’s right to pursue the collateral. The opinion also terminates lengthy and expensive battles with consumers and their lawyers over whether the lender should be forced to submit to discovery in power of sale foreclosures. The opinion, however, may have inadvertently opened the door to consumers seeking to re-litigate a court’s findings in a power of sale foreclosure.

A tenured staple of North Carolina foreclosure law is that a debtor’s lawsuit collaterally attacking the findings in the power of sale foreclosure would fail. Simply put, if a debtor sued the lender alleging, for instance, the lender was not the holder of the note, the lawsuit would fail because the court made that finding in the power of sale foreclosure. The Court’s language in Lucks, however, may put a dent in that armor. A narrow and proper reading of the Court’s opinion should limit this application to rulings denying foreclosure because the power of sale statute permits the court to make findings in the affirmative – i.e., the lender is the holder – but not in the negative – i.e., the lender is not the holder. Otherwise, an interpretation allowing for collateral attacks would undercut the plain language of the statute that provides the clerk’s “finding” or “refusing to find” is a judicial act. Although this case shuts the door on formal litigation in the context of the power of sale, it may have opened a door for consumers.

Published by Jeffrey Bunda on February 24, 2017