In a divided opinion the North Carolina Court of Appeals held that the superior court in appeal from the Clerk of Superior Court in a foreclosure proceeding erred by finding there was no valid debt and that the Trustee had no right to foreclose, reversing the order of the superior court and remanding with instructions to enter an order authorizing foreclosure of the deed of trust in question. The petitioner (the "Trustee") is the substitute trustee on a deed of trust executed in 2003 by the respondents ("Borrowers"), securing a home equity line of credit (a "HELOC"). This appeal by the petitioner stems from a 2023 Superior Court order denying its right to foreclose.

Borrowers purchased the subject property as tenants by the entirety in 1998, in 2003 they purportedly obtained the HELOC secured by the deed of trust in question and in 2018, Ms. Godfrey brought an action against Mr. Dees for divorce and equitable distribution. As a result, Ms. Godfrey was awarded sole title to the property and to the HELOC debt obligation in 2020.

The Trustee commenced this foreclosure in 2021 upon default in payment on the HELOC indebtedness. Based on Ms. Godfrey's testimony that her signatures on the 2003 HELOC loan documents were forged, the Clerk of Superior Court determined that the Trustee had no right to foreclose which order was appealed to the Superior Court for a de novo review. The Court of Appeals' opinion leads to an inference that at a hearing on the matter, Ms. Godfrey's testified that she did not sign the HELOC note in 2003 and the court found the lack of the existence of a valid debt under N.C.G.S. Section 45-21.16(d)(i) and based on her testimony that she did not sign the HELOC deed of trust, the court determined that the Trustee had no right to foreclose under N.C.G.S. Section 45-21.16(d)(iii) and the Trustee appealed.

The opinion begins with a review of the non-judicial foreclosure pursuant to N.C.G.S. Chapter 45 and notes that unless the clerk or judge hearing the matter finds the existence of all six requirements listed in N.C.G.S. Section 45-21.16 (d), a non-judicial foreclosure may not be ordered. "Otherwise, it is the duty of the clerk or judge to deny foreclosure."

The opinion sets out those elements from Section 45-21.16(d),

... If the clerk finds the existence of (i) valid debt of which the party seeking to foreclose is the holder, (ii) default, (iii) right to foreclose under the instrument, (iv) notice to those entitled to such under subsection (b), (v) that the underlying mortgage debt is not a home loan as defined in G.S. 45-101(1b), or if the loan is a home loan under G.S. 45-101(1b), that the pre-foreclosure notice under G.S. 45-102 was provided in all material respects, and that the periods of time established by Article 11 of this Chapter have elapsed, and (vi) that the sale is not barred by G.S. 45-21.12A, then the clerk shall authorize the mortgagee or trustee to proceed under the instrument, and the mortgagee or trustee can give notice of and conduct a sale pursuant to the provisions of this Article. (Emphasis added).

On appeal, the Trustee contended that even absent proof that Ms. Godfrey physically signed the documents in 2003, she would still be bound by them based on the evidence that she "ratified" them through her subsequent actions. The opinion acknowledged that the contention has a valid basis in North Carolina law saying:

Indeed, our Supreme Court adopted a dissent from our Court, which reasoned that a party may ratify an agreement (s)he may not have signed by retroactively authorizing or otherwise approving it, either expressly or by implication. See Goodwin v. Webb, 357 N.C. 40 (2003) (adopting the dissenting opinion from our Court). Specifically, the dissenting judge, whose opinion was adopted by our Supreme Court, stated:

A party ratifies an agreement by retroactively authorizing or otherwise approving it either expressly or by implication. Thus, ratification can occur where a party accepts benefits and performs under an agreement. The act only constitutes ratification if it is done with full knowledge that the acceptance of benefits or the performance arises pursuant to the agreement and is done so without any duress. Goodwin v. Webb, 152 N.C. App. 650, 656-57 (2002) (Greene, J., dissenting) (citations and quotation marks omitted). See also Link v. Link, 278 N.C. 181, 197 (1971) (party bound by agreement she ratifies even if originally procured by fraud or duress).

However, the respondent argued that the Trustee's argument based on "ratification" is an equitable argument in nature and equitable relief is not appropriate for consideration in a Ch. 45 foreclosure hearing before the clerk or the superior court. Rather, she contends, equitable arguments may only be considered in a separate proceeding brought directly before a superior court judge under Section 45-21.34, which provides the procedure to seek an order to enjoin a foreclosure sale on equitable grounds. The Court of Appeals acknowledged this principle as propounded by the North Carolina Supreme Court's opinion of In re Goforth Properties, 334 N.C. 369, 374 (1993). The Court notes "that our Supreme Court has described "ratification" as equitable in nature at times, see Maynard v. Moore, 76 N.C. 158, 164-65 (1877) (stating that 'this defense is purely equitable'), and as legal in nature at times, see Branch Banking & Trust Co. v. Gill, 293 N.C. 164, 193 (1977) (describing ratification as 'a doctrine of the common law, not of equity.')"

The Court of Appeals concluded that it is proper for the Trustee to meet its burden of proving the validity of the instruments in question based on evidence that the respondent ratified them since as the Trustee was not seeking to enjoin the foreclosure, as was the contested issue in the cited cases, it would make no difference whether the ratification argument was considered equitable or legal in nature. The Court observes that the Trustee seeking an order to allow the foreclosure to proceed was simply showing that the 2003 HELOC instruments were valid through the proffered evidence that the respondent either signed those documents or ratified her obligations under them. The opinion observes that the Court of Appeals has repeatedly held that "...it is appropriate for a trustee/lender in meeting its burden in a Section 45-21.16 hearing, to show the existence of a valid debt and deed of trust to offer evidence that the borrower ratified the documents (s)he claims (s)he did not actually sign. See, e.g., In re Espinosa v. Martin, 135 N.C. App. 305, 308-10 (1999) (considering a bank's ratification argument in the context of an appeal from a Section 45-21.16 hearing); In re Davis, 266 N.C. App. 240, *16 (2019) (unpublished) (holding deed of trust was valid in the context of a Section 45-21.16 hearing based on ratification)."

The Court then proceeds to review the facts in evidence concluding that even if the respondent did not actually sign the loan documents, she ratified them:

First, the Trustee points to Ms. Godfrey's filings in her 2018 domestic proceeding against Mr. Dees. In her verified 2018 domestic complaint, she avers and swears to the court that there were "two jointly held debt obligations secured by the [Property]; a home mortgage [obtained from Carolina Farm Credit in 2013] with . . . a current outstanding balance of $660,845.29 . . . and [the 2003 HELOC] held by [RBC Centura's successor entity] with a current outstanding balance of $150,000." In that verified complaint, she requested the district court to divest Mr. Dees of his interest in the marital Property, including the marital HELOC debt. The court eventually agreed and awarded Ms. Godfrey the Property, including the HELOC debt. This evidence is Ms. Godfrey's sworn testimony affirming the HELOC debt was a valid debt and was a marital debt. It shows her acknowledgement the $150,000 was advanced to Respondent and her then-husband for their use in the marriage. Also, she represented in that proceeding that she had personally made several monthly payments under the HELOC. In sum, this evidence is proof of ratification.

Additionally, there is evidence in the record tending to show that Ms. Godfrey and her then-husband requested that RBC Centura subordinate its 2003 HELOC deed of trust to deeds of trust subsequently recorded to secure term mortgage loans. For instance, in 2007, Borrowers' 2002 term mortgage loan came due. They refinanced that debt with a new term mortgage loan, which appeared to be conditioned by the new lender on the 2003 HELOC deed of trust being subordinated to the new 2007 term mortgage loan. Indeed, the record reflects that RBC Centura did subordinate its 2003 HELOC deed of trust to Borrowers' 2007 term loan for Borrowers' benefit. RBC Centura's successor, again, subordinated its 2003 HELOC deed of trust in 2013 when Borrowers again refinanced its term mortgage loan, this time with Carolina Farm Credit.

Further, there is evidence in the record that shows that the proceeds of a previous HELOC loan was satisfied with the 2003 HELOC, representing evidence that Ms. Godfrey benefited from the 2003 HELOC. Ms. Godfrey does not deny the validity of these other loans. In sum, we view the evidence as conclusively establishing that Ms. Godfrey, through her actions, ratified the 2003 HELOC note and deed of trust, such that she is bound by those documents, notwithstanding that she might not have actually signed those documents herself.

Judge Hampson dissented in a separate opinion observing that the dispositive issue in this appeal is whether there is evidence in the record which supports the trial court's conclusion that the respondent did not ratify the loan. The Judge concluded that the trial court's findings were, in fact, supported by evidence in the record and the findings, in turn, supported the conclusion that the respondent did not ratify the indebtedness. The dissenting opinion states:

There is no evidence, in the record or otherwise, that [Petitioner] ratified the transaction evidenced by the Loan Documents through her actions, conduct, or otherwise. Specifically, there is no evidence that [Petitioner] (i) received, directly or indirectly, any portion of the proceeds from the Loan, (ii) was aware-and had knowledge-of her forged signature on the Loan Documents prior to the commencement of the above-captioned special proceeding, and (iii) benefitted-directly or indirectly-from the transaction evidenced by the Loan Documents. No portion of the proceeds generated and extended pursuant to the Loan were utilized to purchase the Property.

The balance of the dissenting opinion can be seen as a marshaling of the facts in the record deemed to confirm the Judge's conclusion that the evidence in the record "supports the trial court's factual Findings. Those Findings, in turn, support the trial court's Conclusion Respondent did not ratify the HELOC Debt or Deed of Trust securing the debt. Consequently, the trial court's order denying foreclosure under N.C. Gen. Stat. § 45-21.16(d) on the basis there was insufficient evidence of a valid debt or a right to foreclose under the Deed of Trust."

Session Law 2023-259 ("Current Operations Appropriations Act of 2023.") became law on October 3, 2023 ending the automatic appellate review by the North Carolina Supreme Court as a matter of right resulting from a dissenting opinion of the Court of Appeals and repealing N.C.G.S. Section 7A-30(2). The Supreme Court's opinion in Bottoms Towing & Recovery, LLC v. Circle of Seven, LLC, 386 N.C. 359 (2024) makes it clear that long as an "appeal was filed and docketed at the Court of Appeals before the effective date of that act [3 October 2023]," the parties may still rely on the prior N.C.G.S. Section 7A-30(2) to obtain an appeal as a matter of right to the Supreme Court based on a dissenting opinion in the Court of Appeals. As this appeal was apparently docketed February 7, 2024, it would seem to require a discretionary review to be considered further. No petition for review has been filed at the time of the writing of this article.

This case should be of interest to those of our peers litigating the foreclosure process and demonstrates the disparate conclusions that may be drawn by different jurists considering the same facts.