Opinion
CASE NO. 02-03715-8-JRL, ADVERSARY PROCEEDING NO. L-02-00230-8-AP
November 5, 2003
ORDER
This case is before the court on a motion for summary judgment filed by plaintiffs
Melvin E. and Mary L. Barfield. Defendants Wells Fargo Bank Minnesota, N.A., fka/Norwest Bank, Minnesota, N.A., Trustee for First Union Home Equity Loan Trust 1997-3 ("Wells Fargo"), and Wachovia Mortgage Corporation fka/First Union Mortgage Corporation ("Wachovia") responded by filing cross-motions for summary judgment. The motions were heard on October 1, 2003 in Wilson, North Carolina. For the reasons stated below, the defendants' motions for summary judgment are granted.
I. Standard of Review
"[S]ummary judgment is proper `if the pleadings, depositions, answers to interrogatories and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.'" Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). In making this determination, conflicts are resolved by viewing all facts and inferences to be drawn from the facts in the light most favorable to the non-moving party.United States v. Diebold, Inc., 369 U.S. 654 (1962).
Nevertheless, an issue of fact cannot be created through "mere speculation or the building of one inference upon another." Beale v. Hardy, 769 F.2d 213, 214 (4th Cir. 1985). Rather, "[t]he essence of the inquiry that the court must make is `whether the evidence presents a sufficient disagreement to require submission to a jury or whether it is so one-sided that one party must prevail as a matter of law.'" Cooke v. Manufactured Homes, Inc., 998 F.2d 1256, 1260 (4th Cir. 1993),quoting Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 251-52 (1986).
II. Facts
The relevant facts in this case are not in dispute. Pursuant to a telephone sales solicitation by Centex Home Equity Company, LLC ("Centex") to the Barfields, debtors agreed to enter into what they originally believed was a thirty-year loan in the amount of $54,000 secured by their home in Dudley, North Carolina. The loan was to be used to refinance an existing home mortgage and consolidate other debts. Shortly before executing the agreement, Centex indicated it could not extend the loan at the originally-promised rate due to the Barfields' previous credit history, so they raised the rate to 11.8%. The debtors chose a local Goldsboro lawyer to draw up the deed of trust and conduct the closing. On the day of the closing, their lawyer informed the debtors that he received a balloon note on the loan as a last minute addition. Despite these modifications to the proposed transaction, on August 25, 1997, the debtors signed a promissory note and executed a deed of trust on their home which was subsequently recorded in the Wayne County Register of Deeds. The deed of trust designated as trustee "RICKY J. CAROTHERSOR KARREN P. BATES OR JUDSON H. CROOM, JR." (underline added) with Centex named as the beneficiary.
Centex has subsequently sold the promissory note and accompanying deed of trust, and Wachovia is currently the beneficiary on the deed of trust.
In late 2001, debtors fell behind in their payments and were notified by Fairbanks Capital Corp. ("Fairbanks"), the loan servicer for the subsequent holder of the loan, that they were $8,000.00 in arrears. In February, 2002, Fairbanks substituted defendant Phillip A. Glass as trustee on the deed of trust, and subsequently recorded the substitution in the Wayne County Register of Deeds. Fairbanks initiated foreclosure proceedings on the debtors' deed of trust, and on March 6, 2002 filed a Notice of Foreclosure Sale in the Wayne County Superior Court. The hearing was held on April 10, 2002, and the Clerk of Court entered an order authorizing foreclosure. While in March, prior to the hearing, the debtors had received proper notice of hearing in foreclosure, they did not attend the hearing or later appeal the clerk's findings. The foreclosure was stayed when debtors filed for chapter 13 bankruptcy protection on May 3, 2002, which was within the upset bid period after the sale.
Plaintiffs/debtors presently seek to have the deed of trust declared void, and the promissory note secured by it classified as an unsecured debt, based on the deed of trust's original designation of alternate trustees. Defendants seek to confirm the secured classification of the debt by reasserting the validity of the deed of trust, or in the alternative, by arguing that the debtors' failure to challenge the validity of the deed of trust at the foreclosure hearing or appeal the clerk's findings precludes them from now raising the issue by res judicata.
III. Discussion
The issues presented to the court are (1) whether the initial designation of alternate trustees in a deed of trust voids the instrument under North Carolina law; and (2) whether a debtor who receives proper notice but fails to attend the foreclosure hearing and contest the validity of the deed of trust during the hearing, or fails to appeal the clerk's findings, is precluded by res judicata from raising the issue of the validity of the deed of trust at a later date.
Validity of Deed of Trust
State law creates and defines property rights, and in the absence of any controlling federal law such rights are not analyzed differently when an interested party is involved in a bankruptcy proceeding. Butner v. U.S., 440 U.S. 48, 55 (1979) (cited in Barnhill v. Johnson, 503 U.S. 393, 397 (1992)). Federal bankruptcy laws recognize and enforce state laws concerning the validity of mortgages.Butner, 440 U.S. at 54, n. 9 citing Stellwagon v. Clum, 245 U.S. 605, 613 (1918).
North Carolina law is silent as to whether the original designation of alternative trustees in a deed of trust renders the instrument void or voidable. Chapter 45 of the North Carolina statutes governs mortgages and deeds of trust and contemplates the existence of more than one trustee by expressly allowing for substitution. Holders of promissory notes secured by deeds of trust may, at their discretion, substitute a trustee by executing a written document and properly recording it with the register of deeds. N.C. Gen. Stat. § 45-10 (2001). Alternatively, the clerk of superior court may enter an order appointing a substitute trustee if the former trustee dies or becomes incapacitated. § 45-11. The substituted trustee is vested with full power and authority to foreclose on property as if he or she were the original trustee, § 45-11, and where the trustee is substituted in accordance with the method proscribed in the deed of trust, no proceedings are required. Thompson v. State, 223 N.C. 340, 343, 26 S.E.2d 902, 904 (1943). The statutes, however, do not address the viability of deeds of trust with contemporaneously-appointed alternate trustees.
Plaintiffs argue that a deed of trust is a conveyance of real estate, and as such, must meet all state requirements for transferring land. It is established that in order for a deed to be operative as a conveyance, it must "designate as grantee an existing person . . . capable of taking title to the land." Morton v. Thornton, 259 N.C. 697, 700, 131 S.E.2d 378, 380 (1963). Plaintiffs apply the requirements for a valid deed, specifically the provisions regarding grantees, to trustees in a deed of trust and, following this line of reasoning, assert that a grant designated to several alternate trustees by separating each named trustee in the deed of trust with the word "or" would be ambiguous as to the identity of the trustee. This ambiguity would render the deed of trust void for vagueness, invalidating the security interest and making the debt secured by it unsecured.
The trustee in a deed of trust does not, however, assume the same role as a grantee in a deed. While legal title to property passes to the mortgagee or trustee under a deed of trust as security for the debt, the mortgagor or trustor remains the equitable owner of land. Mitchell v. Shuford, 200 N.C. 321, 156 S.E. 513, 514 (1931); Daniel Boone Complex, Inc. v. Furst, 43 N.C. App. 95, 101, 258 S.E.2d 379, 385 (1979). The trustee's function is merely to sell the mortgaged property upon the mortgagor's default at the request of the holder of the note. Tonkins v. City of Greensboro, 175 F. Supp. 476, 479 (M.D. N.C. 1959). A mortgagor's designation of trustee(s) is therefore not on a parallel with the naming of a grantee in a deed, and accordingly, the naming of alternate trustees in a deed of trust will not make it fail.
This court arrives at the same conclusion by applying North Carolina trust law which has held that "equity will not allow a trust to fail for want of a trustee." Fulk Needham, Inc. v. U.S., 288 F. Supp. 39, 44 (D.C. N.C. 1968). An ambiguity regarding the designation of beneficiary may be fatal to a devise in trust, but if the uncertainty concerns the identity of the trustee, the court will protect the trust and appoint a new trustee if needed. Keith v. Scales, 124 N.C. 497, 32 S.E. 809, 810-11 (1899) (where ambiguity regarding the trustee did not affect the validity of a charitable bequest and devise of the residue of testator's estate). The law in other states regarding the voidability of deeds of trust due to improper designation of trustees is equally unclear. While case law in various states acknowledges the existence of multiple or alternate trustees in deeds of trust, no state has definitively ruled on the question of whether an initial designation of alternative trustees voids the deed of trust.
In a recent case heard by the Supreme Court of Tennessee, the court held that an improper notary acknowledgment of a grantor of a deed of trust created an uncertainty about the legal effectiveness of the instrument, thereby making it null and void. Crim v. EMC Mortgage Corp., 81 S.W.3d 764 (Tenn. 2002) (holding that deed of trust was null and void only as to transfer of husband's interest in property where wife, as power or attorney, signed deed of trust for her husband but notary's acknowledgment inaccurately recited that both spouses personally appeared).
In a Maryland case, a bankruptcy creditor petitioned the court to stay a foreclosure on debtors' real property, claiming that the deed of trust was invalid because one of the trustees also served as notary and attested to the signatures of the grantors. Montgomery Tire Service, Inc. v. Towsner, 269 A.2d 572 (Md. 1970). In deciding the case, the Maryland Court of Appeals cited a nineteenth century Illinois case,Darst v. Gall, 83 Ill. 136 (1876), where one trustee in a deed of trust was disqualified for acknowledging the signature of the grantor, but the deed's validity was not affected as to alternate trustees.Montgomery Tire, 269 A.2d at 575. The Illinois court inDarst explained that the "trustees named were empowered to act separately, and in the alternative . . . if one became disqualified or was unable to act another might act." Id. citing Darst, 83 Ill. 136. The Maryland court in Montgomery Tire similarly ruled that the disqualification of one trustee in a deed of trust, based on his conflict of interest, did not disqualify the other trustee from his power and duty to foreclose on the property upon the debtors' default. Montgomery Tire, 269 A.2d at 572.
In a California case, a debtor sought declaratory and injunctive relief, quiet title and damages where an original trustee in a deed of trust, following the appointment of a substitute trustee, sold the debtor's property in a foreclosure sale. Dimock v. Emerald Properties LLC, 97 Cal.Rptr.2d 255, 81 Cal.App.4th 868 (2000). The debtor argued that the filing of a substitute trustee deprived the original trustee of the power to conduct a foreclosure sale, and thus the sale was void. Id. The court, in its reading of California statutes, stated:
[T]here simply cannot be at any given time more than one person with the power to conduct a sale under a deed of trust. We would create inestimable levels of confusion, chaos and litigation were we to permit a beneficiary to appoint multiple trustees, each one retaining the power to sell a borrower's property.
Id. at 260, 81 Cal.App.4th at 876. The court consequently ruled that the original trustee had no power to convey the property, and the sale was declared void. Id. at 261, 81 Cal.App.4th at 876. Dimock, however, is distinguishable from the instant case in that it deals with successive trustees as opposed to concurrent alternative trustees.
The Supreme Court of Arizona addressed the issue of whether failure to designate a trustee in a deed of trust invalidates it. Bisbee v. Sec. Nat'l Bank Trust Co., 754 P.2d 1135 (Ariz. 1988). The debtors maintained that because the deed of trust failed to designate a trustee, no one was named to receive a transfer of the property and thus a lien was not created. Id. at 1137. The court interpreted state statutes to provide that failure of a trustee to qualify, or unwillingness or inability to serve, does not invalidate the deed of trust or invalidate the lien. Id. "The only effect of the absence of a valid trustee is that no action required to be taken by the trustee may be taken until a successor trustee is appointed." Id. Accordingly, the court held that "mere failure to designate trustees" does not invalidate deeds of trust. Id. at 1138.
Despite the plaintiff's argument that, like deeds, deeds of trust require an identifiable trustee to be valid, this court does not find that the initial designation of alternate trustees voids the debtors' deed of trust naming Centex as beneficiary. There is ample precedent in North Carolina and other jurisdictions explaining that the sole role of a trustee in a deed of trust is to initiate and facilitate foreclosure of the encumbered property upon default by the debtor. The statutes provide deed of trust beneficiaries flexibility in assigning and substituting the responsible party to perform this function, allowing for ex parte substitution of trustees with no notice requirement.Thompson v. State, 223 N.C. 340, 343, 26 S.E.2d 902, 904 (1943) (citing Raleigh Real Estate Trust Co. v. Padgett, 194 N.C. 727, 729, 140 S.E. 714 (1927) ("[W]here a trustee is substituted in accordance with the method expressed in a deed of trust, no proceedings are necessary. . . .")). Mere designation of alternate trustees, especially where the multiple alternates have since been substituted for an individually-named trustee, does not void defendants' deed of trust, converting the debtors' promissory note to an unsecured debt.
Res Judicata
Defendants Wells Fargo and Fairbanks assert that res judicata applies to clerk of superior court orders authorizing foreclosure, and therefore, plaintiffs are precluded from raising the issue of the validity of the deed of trust.
There are two methods of foreclosure available in North Carolina — foreclosure by action and foreclosure by power of sale. Powers of sale are contractual and are generally written into deeds of trust. If a creditor qualifies to exercise the more expeditious power of sale option, state statutes specify the procedures that mortgagees and trustees must follow. N.C. Gen. Stat. § 45-21.16 (2001). The trustee must file a notice of hearing with the clerk of court, and all interested parties must receive notice not less than ten days prior to the hearing. § 45-21.16(a). The notice must inform the debtor of his or her right to appear before the clerk at the hearing and to be given the opportunity to show cause as to why foreclosure should not be held. § 45-21.16(c)(7).
To qualify for power of sale foreclosure, the presiding clerk must determine whether (1) there is a valid debt; (2) the debtor has defaulted; (3) the trustee has the right to foreclose under the instrument; and (4) that proper notice was given. § 45-21.16(d). The clerk's determination as to these factors is a judicial act, and if the clerk makes a positive finding as to the existence of all four factors, he or she will authorize the foreclosure. § 45-21.16(d1). In making these determinations, the clerk has the authority to determine whether the applicable deed of trust contains a power of sale, and also whether the property is still legally secured by the deed of trust. In re Michael, Weinman Assoc. Gen. Part., 333 N.C. 221, 230, 424 S.E.2d 385, 390 (1993). Where the non-prevailing party contests the clerk's determination, the statutes provide a mechanism for de novo appeal, Id.; see § 45-21.16(d1) (clerk's finding may be appealed to the district or superior court judge having jurisdiction within ten days and heard de novo).
North Carolina's Court of Appeals held in a 1985 case that issues decided by the clerk of court pursuant to the formal power of sale procedure are res judicata, and when the clerk's order was not appealed it became final as to the issues and the parties. Phil Mechanic Constr. Co. v. Haywood, 72 N.C. App. 318, 325 S.E.2d 1 (1985). The court stated, "[W]e do not agree that an order entered by the Clerk of Superior Court construing the validity of the debt and the trustee's right to foreclose . . . cannot be res judicata as to a subsequent action based on the issues decided in the clerk's order."Id. at 321, 325 S.E.2d at 3. 28 U.S.C. § 1652 obligates a federal court to give a state court judgment the same preclusive effect as would a state court.
In this case, trustee Phillip A. Glass filed a notice of hearing of foreclosure with the Wayne County Clerk of Superior Court and provided proper notice to plaintiffs. Plaintiffs failed to appear at the April, 2002 hearing, and they did not appeal the clerk's findings or authorization of foreclosure within the prescribed ten-day period. Because the plaintiffs, therefore, failed to raise the issue of the validity of the deed at either the hearing or in appeal, they are now precluded from raising the issue in an attempt to have the deed of trust declared void and their debt to Wachovia reclassified as unsecured debt.
IV. Conclusion
For the foregoing reasons, summary judgment is allowed in favor of the defendants. The plaintiffs/debtors' deed of trust securing their promissory note to Wachovia is valid; therefore, debtors' debt to Wachovia is correctly classified as secured debt.