In a recent opinion issued by the Court of Appeals of North Carolina (In re N.C. (Future Advance) Deed of Tr. By Nicor, LLC, No. COA18-1071 (N.C. Ct. App. Aug. 6, 2019)), the Court considered whether the trial court erred in permitting foreclosures to proceed after the holder of the notes had already obtained a judgment against the obligors for the entire amount of the debt secured by the deeds of trust.
A closer look at the underlying facts may help predict where the Court is headed on this issue. Nicor, LLC and Forest Haven, LLC (collectively, “Obligors”) separately executed promissory notes and deeds of trust to secure repayment of the notes for the benefit of BB&T. BB&T assigned the notes and deeds of trust to RREF II WBC Acquisitions, LLC ("RREF"). Obligors subsequently defaulted on the notes and entered into a forbearance agreement with RREF. As part of the forbearance agreement, Obligors executed a confession of judgment, agreeing to entry of judgment against them if they failed to satisfy the terms of the forbearance agreement. Further, the forbearance agreement included a provision allowing RREF “[u]pon termination of the Forbearance Period” to foreclose upon the deeds of trust that were not paid off according to the forbearance agreement. A year later the parties modified the forbearance agreement to give Obligors additional time, but Obligors ultimately failed to satisfy the terms of the agreement and RREF filed the executed confession of judgment. The clerk of court entered judgment against Obligors for the unpaid amount plus a default rate of interest.
After obtaining the judgment, RREF initiated foreclosure proceedings pursuant to North Carolina’s power of sale foreclosure statutes and assigned each of the notes and deeds of trust to CL45 MW Loan 1, LLC (“CL45”). At the foreclosure hearing, the assistant clerk of court determined that the requirements of N.C. Gen. Stat. 45-21.16(d) were satisfied, and entered an order authorizing the foreclosure sale of the real estate encumbered by the deeds of trust. Obligors appealed and the matters were consolidated and heard de novo in Superior Court. The trial court judge entered orders of foreclosure sale, concluding that the requirements of N.C. Gen. Stat. 45-21.16 had been met. Obligors timely appealed to the North Carolina Court of Appeals.
On appeal, Obligors presented two main arguments:
- (1) The initial entry of judgment against them in personam for the full amount of the debt owed pursuant to the promissory note precluded the holder from subsequently proceeding with foreclosure in rem, because allowing a foreclosure in that circumstance would in effect repeal N.C. Gen. Stat. § 45-21.36; and
- (2) N.C. Gen. Stat. § 45-21.36 should be construed “with the same breadth" as the Supreme Court of North Carolina construed §45-21.38 in Ross Realty Co. v. First Citizens Bank & Trust Co., 296 N.C. 3666, 250 S.E.2d 271 (1979)), thereby providing anti-deficiency protection when a foreclosing mortgagee has already taken a judgment against the mortgagor.
The purpose of § 45-21.36 is "to protect a debtor from a creditor unilaterally determining the amount to be applied to a debt resulting from the trustee's sale of collateral." The Court noted that “where the foreclosing creditor is the high bidder for the property for an amount less than the debt owed to the foreclosing creditor in a power-of-sale foreclosure, and the foreclosing creditor subsequently sues to recover the deficiency, the deficiency may be eliminated or reduced in two circumstances.
- (1) First, the court may eliminate the deficiency if the debtor can show ‘that the property sold was fairly worth the amount of the debt secured by it at the time and place of sale.’”(citing § 45-21.36; United Cmty. Bank v. Wolfe, 242 N.C. App. 245, 246, 775 S.E.2d 677, 679 (2015), rev'd on other grounds, 369 N.C. 555, 799 S.E.2d 269 (2017)).
- (2) Second, the deficiency can be reduced by the court “upon the debtor's showing ‘that the amount bid [by the foreclosing creditor] was substantially less than its true value.’" (citing § 45-21.36; Wolfe, 242 N.C. App. at 246, 775 S.E.2d at 679.)
Recognizing the protection of the statute as “an equitable method of calculating the indebtedness,” the Court stated that any waiver of it “as a prerequisite to receipt of a mortgage or as a condition of a guarantee agreement would violate public policy.” Obligors argued that §45-21.36 would be rendered meaningless if creditors were allowed to sidestep the deficiency offset by the maneuvers demonstrated in this case, and argued that after taking a judgment for the entire amount of the debt, CL45, as the holder of the notes, lost the ‘right to foreclose on the underlying [d]eeds of [t]rust as a matter of law.’" (Emphasis in original).
Notably, the Court stopped short of applying any of the equitable principles underlying §45-21.36 to the instant case and failed to discuss whether the note’s indebtedness was essentially dissolved into the judgment thereby making a subsequent foreclosure improper. While the Court may have been impressed with the equitable defense argument, the Court declined to rule on it since the appeal before it involved only a ruling by a trial court which lacked equitable jurisdiction in a power-of-sale foreclosure proceeding.
Anti-Deficiency Protection and Discussion of Ross Realty Co.
Finally, Obligors argued that §45-21.36 should be construed “with the same breadth" as the Supreme Court of North Carolina construed §45-21.38 in Ross Realty Co. v. First Citizens Bank & Trust Co., 296 N.C. 366, 250 S.E.2d 271 (1979), thereby providing anti-deficiency protection when a foreclosing mortgagee has already taken a judgment against the mortgagor.
The mortgages in the instant case were not covered by the protections §45-21.38 because they were not purchase-money mortgages. Nevertheless, the Court provided extensive discussion of Ross, noting in part that “[o]ur Supreme Court interpreted this purchase-money mortgage anti-deficiency statute as limiting a foreclosing creditor, who was also the original seller of the land, to the remedy of foreclosing on the land” and that “the Ross Court stated that "the 1933 General Assembly intended to protect vendees from oppression by vendors and mortgagors from oppression by mortgagees." The Court also observed that “our Supreme Court determined that it was "compelled to construe [section 45-21.38] more broadly and . . . conclude that the Legislature intended to take away from creditors the option of suing upon the note in a purchase-money mortgage transaction. This construction of the statute not only prevents its evasion but also gives effect to the Legislature's intent."
While the Court examined the equitable defense argument in Ross at length, the Court again declined to engage in further analysis since the appeal before it involved only a ruling by a trial court which lacked equitable jurisdiction in a power-of-sale foreclosure proceeding.
In finding that the trial court did not have the authority to make the determination that the filing of the Confession of Judgment did not preclude foreclosure in a power-of-sale foreclosure proceeding and declining to allow equitable defenses in the instant appeal, the Court seemingly encouraged the Obligors to seek to enjoin the power-of-sale foreclosure on equitable grounds in a subsequent hearing pursuant to N.C. Gen. Stat. § 45-21.34: “[i]f Obligors are unsuccessful in enjoining the foreclosure on equitable grounds pursuant to N.C. Gen. Stat. § 45-21.34, they may appeal that order to this Court and make their arguments again.”
It may be only a matter of time before the Court of Appeals of North Carolina will allow an equitable defense to a subsequent foreclosure like the one in this case.
Published by Meredith Murchison on October 7, 2019.