Adding Description Post-Closing Invalidates Mortgage
Chris Burti, Vice President and Legal Counsel

In Re: Hudson, NO. COA06-345, filed on April 3, 2007 may very well prove to be a ‘must read’
decision for real property practitioners. The North Carolina Court of Appeals affirmed the decision of the Superior Court invalidating a deed of trust due to description issues in a de novo hearing on the appeal of the ruling of the Clerk of Superior Court in a foreclosure proceeding. A review of the decision followed by a discussion of the ramifications may prove interesting.

In 1996, the Hudsons (respondents) borrowed $232,610.96 from Transamerica Financial Services (Transamerica). Transamerica was succeeded in interest by Beneficial Mortgage Company of North America (Beneficial). The Court refers to both as “petitioner.” Respondents executed a promissory note that provided that the loan was secured by specific real property. They also executed a deed of trust securing the loan with real estate listed on an “Attachment A” to the deed of trust. The note listed four typed addresses and four handwritten addresses as collateral. According to the opinion, Attachment A to the deed of trust described six parcels:

PARCEL I: Being all of Lot 10, Block A, Section 2, of Echo Heights as recorded in Book of Maps 1955, Page 113, Wake County Registry.

Tax Map No.: 680-0458

PARCEL II: Being all of Lot 12, Block A Section 2, of Echo Heights as recorded in Book of Maps 1955, Page 113, Wake County Registry.

Tax Map No.: 680-0460

PARCEL III: Being all of Lot 139, Fisher Heights Subdivision, as shown on map entitled “Fisher Heights”, as recorded in Book of Maps 1920, Volume 3, Page 178, Wake County Registry. Together with improvements located thereon; said property being located at 104 Lord Anson Drive, Raleigh, NC.

PARCEL IV: Being all of Lot 10 of Brown-Birch Apartments as depicted in Book of Maps 1985, Page 1148, Wake County Registry. 1212 Angelus Drive Raleigh, North Carolina

PARCEL V: BEING ALL OF Lots 140 and Part of Lot 141, Fisher Heights Subdivision, as shown on plat recorded in Book of Maps 1990, page 154, Wake County Registry. Said plat is a recombination of Lots 140 and Part of Lot 141 as shown in plat recorded in Book of Maps 1920, Page 178, Wake County Registry to which reference is also made. Together with improvements located thereon; said property being located at 106 Lord Anson Drive, Raleigh, North Carolina.

PARCEL VI:
BEING all of Lot 83, Foxcroft Subdivision, Section 3, as recorded in Book of Maps 1971, Page 496, Wake County Registry.

The Court recited the following facts: “Mr. Hudson testified that at the real estate closing for this transaction he did not execute any documents that included the ‘Woodland Road properties as security interest for the loan.’ The deed of trust that he signed did not include an Attachment A, and the Hudsons had never contemplated or discussed using the Woodland Road properties as security interest. Those properties were sold one month later, as the Hudsons had anticipated at the time of the transaction. Mr. Hudson testified that he ‘was not given any documents at closing. [He] received them maybe two to three weeks later in mail. [He] should have been given documents, but [he] was not given documents.’ Mr. Hudson further testified that the note he signed ‘had [the] prepayment notice struck out and [was] initialed by the loan officer. The Woodland Road properties were not included at the time of closing. They were added later without my consent or knowledge.’ He then stated that the deed of trust offered by petitioner was not ‘what [he] signed and does not bear [his] signature.’”

The dispute arose when the respondents made a payment of almost $50,000 on their loan after selling the Woodland Road properties. Respondents subsequently discovered that most of the payments had been applied to a prepayment penalty. Respondents made calls and sent numerous letters and faxes requesting copies of the loan documents and explanations for petitioner's actions. After some delay, they finally received copies of the purported loan documents and discovered that they were not the ones they had signed. Petitioner was viewed as being unresponsive to Respondents' attempts to clear up the matter.

In 2004, petitioner notified respondents that they were in default and that failure to cure would result in acceleration of the debt and foreclosure of the deed of trust. Respondents responded by demanding cancellation of the note and deed of trust and a refund of their monies due to the fact that the instruments were not those signed by respondents. Petitioner commenced a foreclosure proceeding on the six properties listed on Attachment A of the note. At the foreclosure hearing, the Clerk of Superior Court for Wake County issued an order of sale for the properties on Lord Anson Drive, Angelus Drive, and Edington Lane. The Clerk declared that, “the Debtors have demonstrated a valid legal reason why foreclosure should not proceed” as to the Woodland Road properties. Respondents appealed the Clerk’s order and the Superior Court dismissed petitioner's foreclosure petition on all of the properties, resulting in the instant appeal.

N.C.G.S. Section 45-21.16(d) requires that:
(d) . . . the clerk shall consider the evidence of the parties and may consider, in addition to other forms of evidence required or permitted by law, affidavits and certified copies of documents. 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, and

(iv) notice to those entitled to such under subsection (b), then the clerk shall authorize the mortgagee or trustee to proceed under the instrument . . . .

N.C.G.S. Section 45-21.16(d1) provides that:

(d1) The act of the clerk in so finding or refusing to so find is a judicial act and may be appealed to the judge of the district or superior court having jurisdiction at time within 10 days after said act. Appeals from said act of the clerk shall be heard de novo.

Petitioner argued that the trial court erred by disallowing the foreclosure because the deed of trust satisfied the Statute of Frauds and the trustee presented sufficient competent evidence to satisfy the required four findings. The Court also noted that “Petitioner argues that by considering respondents' evidence of petitioner's alleged fraudulent acts, and then making findings and conclusions of law in relation to those acts, ‘the trial judge exceeded both his statutory jurisdiction and the scope of inquiry permitted in the context of a hearing conducted pursuant to N.C. Gen. Stat. § 45-21.16 by invoking equitable jurisdiction.’”

The Court of Appeals disagreed noting that the North Carolina Supreme Court has held “that determining which property is legally secured by a deed of trust is a proper issue and element of proof before the Clerk of Superior Court. Therefore, if a party contends that the property is not secured,” as the respondents contend in this case “then such contention may be raised as a defense to the four requisite findings under N.C.G.S. § 45- 21.16(d).” In re Foreclosure of Michael Weinman Associates, 333 N.C. 221, (1993). The Court of Appeals opinion elaborates that “this Court has specifically held that the forgery of loan documents is a proper legal defense to a lender's assertion that a ‘valid debt’ exists.Espinosa, 135 N.C. App. at 308, 520 S.E.2d 108 at 111.” This makes it clear that an examination of the underlying validity of the loan documents relates to the finding of a “valid debt” under North Carolina General Statutes section 45-21.16 and even though based in accusations of Fraud, is nonetheless a “legal” issue rather than an equitable one.

Of particular interest to real property professionals should be the way in which the Court dealt with Petitioner’s objection to the trial judge's conclusion that “[s]ince the Deed of Trust executed by Will and Betty Hudson contained no description of real property, it does not meet the provisions of the Statute of Frauds and is void.” The Court cites established case law showing that is axiomatic that a conveyance must include an adequate description of the land or a reference to something extrinsic that will render a certain description of the locus in quo. Here, the Court determined that the deed of trust did not include a description of the real property at the time respondents executed the instrument. The Court of Appeals properly accepts the Superior Court’s finding that the description was later added to the deed of trust without the knowledge or consent of the respondents. Petitioner apparently argued that the documents the respondents did sign made it clear that they intended to convey the four parcels of land as security for their loan, and that was sufficient to satisfy the Statute of Frauds.

The Court of Appeals did not find these arguments persuasive. While it was clear that the respondents intended to convey some real property as security for their loan, the fact that the deed as recorded includes the missing legal descriptions of the property is not legally sufficient to convey the legal interest to the trustee. The petitioner cited “Board of Transportation v. Pelletier, 38 N.C. App. 533, 248 S.E.2d 413 (1978), for the proposition that ‘in construing a recorded deed, deed of trust, or any other conveyance of real property, courts effort to determine the intent of the parties to the instrument from an inspection of the language within the “four corners” of the recorded instrument itself.’” The Court distinguished the holding in Pelletier noting that “the trial judge, who was not conducting a hearing pursuant to N.C. Gen. Stat. § 45-21.16, had before him an instrument whose validity was not in question. Rather, the judge's sole purpose was to determine who owned a particular parcel of land by construing the deed description. Id. at 536-37, 248 S.E.2d at 415. In contrast, the superior court judge in this case had to determine whether foreclosure was proper when the supporting documents themselves were contested.”

One concern with this decision is that it appears that the trial court and the Court of Appeals may be understood to have gone further than they appear to have actually gone with this decision. The logic of the Court with regard to the penciled in references and added descriptions is inescapable and one upon which we always counsel caution. It is unreasonable to expect a court to enforce an instrument, the validity of which is contested and in which the party seeking enforcement subsequently adds essential terms. The clerk in this matter apparently recognized that the note referenced in the deed of trust contained typed information that arguably indicated an intent to encumber those four identifiable tracts at a minimum. This case should not be construed as holding that an address is an insufficient description. The opinion is not perfectly clear, but it appears that there was no reference in the deed of trust that the note contained any descriptive information and we surmise that there was only the typical identifying information of the secured note. Had the deed of trust made explicit reference to descriptive information being found on the note, this opinion would be troubling. It is fair to infer that descriptive information that is referenced on a note that is, itself, referenced will not by that reference constitute a sufficient description.

We anticipate that the practical manifestations of this case will present themselves in different contexts and we would like to address two of those. It has become the prevalent practice in this State to place property descriptions on exhibits that are attached to deeds, deeds of trust and other conveyances. It will be imperative after this opinion that such description exhibits be prepared and be attached to all conveyances prior to or at the time of execution. Many years ago it was the common, if not the universal, practice for attorneys to secure the initials of the parties executing important documents on each page of the instrument. This case should lead attorneys to consider having these exhibits initialed in like manner as evidence of meeting the requirements for validity.

The second area that we expect to see an impact will involve re-recording corrected instruments. Many real estate practitioners assume that where a deed of trust references an attached description exhibit and it turns out not to be attached upon recording, that it is an acceptable practice to re-record the instrument with the description attached pursuant to N.C.G.S. Section 47-365.1. The statute does not give guidance as to what constitutes an “obvious” error, however Green v. Crane, 96 N.C.App. 464 (1990) has shown us that an omitted description should not be considered as being within the purview of the statute. In Re: Hudson lends ammunition to the argument to the implications of Green as being a prohibition of the practice if the attachment is necessary to the validity of the conveyance. We can infer that the error should be obvious on its face or, at the very least, should not change the obligations of the grantor before the statute should be used. Where the instrument contains information on its face that is sufficient to describe the property, the attachment is arguably surplusage and re-recording with the attachment would be harmless clarification. The practice of re-recording conveyances pursuant to N.C.G.S. Section 47-365.1 as a result of description errors should always be considered judiciously and if title insurance is involved, a consultation with underwriting counsel recommended.

Dirt Tales From the Deed Vault - Episode 3
John Dillard, Vice President and Legal Counsel

In the continuation of claims prevention, Statewide Title looks at another situation this month that raises the question of whether a title claim might have been prevented.

Attorney "A" was contacted by a real estate developer "D" to handle a closing for a prospective purchaser to whom D was selling.  The developer stated that he was looking for an attorney to represent him for what would amount to a large number of transactions over the upcoming two years.  He even hinted that he would be able to steer the closings on the buyer's side to A since he was paying for a part of the closing costs as a part of an incentive to buy in his development, Verde Acre.

A agrees to do the closing.  A examines the title to the development in order to build a base file since he anticipates doing a number of closings.  A notices from her title examination there is a deed of trust that covers all of Verde Acre, but that there are also a number of releases on record.  A informs D that she has found the existing deed of trust and will contact the bank to see how much the bank will need to release the proposed buyer's tract from their mortgage.  D tells A not to bother that he has a standing agreement with the bank and that the releases are taken care of outside the closing and filed by the bank.  A goes ahead and schedules the closing, prepares all the other necessary documentation and obtains a title insurance commitment for the buyer.  The closing is held on the date scheduled and everything goes very smoothly.  A is sure she has convinced D and the buyer that she has done a great job and she is looking forward to doing more closings that D sends her way.

A month or so passes without A hearing anything from D.  A has gotten busy with other matters and has forgotten about D for the time being.  It's not until she is doing a bring down for recording that she notices a number of deeds from D that have been recorded since her closing with him.  And she also notices that each of these deeds was prepared by a different attorney.  It seems on each transaction D has sought and obtained a new lawyer.  "He must be extremely hard to please" was all A thought. 

A few months later the client that A did the closing for at developer D's request shows up in her office one day, visibly upset because her property has just been served with a notice of foreclosure.  Thinking this must be a mistake A goes to the courthouse to look in the foreclosure file.  What she discovers is that developer D has fled to parts unknown and service was being obtained by posting the property.  Still A feels her client will be fine because they obtained a release for their property.  As it turns out all the releases that had been placed on record by D had been forged.  Luckily, the buyer had title insurance.

Was there any way A could have prevented this claim from occurring?  There were some warning signs to which she should have paid closer attention.  First, any time a client does not want the closing attorney to be involved in the payoff or release of an existing mortgage of record should throw up a red flag.  In this instance, a simple phone call to the bank to verify that the release was being prepared and would be ready for the day of closing would have been very helpful in this matter.

Second, the fact that each deed from the developer had been drafted by a different attorney should have raised suspicions on A's part.  In conducting her title examination, A should have paid closer attention to the previous deeds in the chain of title conveyed by the developer.  This in conjunction with the fact that the developer insisted on taking care of the release deed should have been enough to raise a red flag.  Too often matters look crystal clear in hindsight, but all too often clues are right in front of us that would prevent a claim from happening if only we had slowed down and paid a bit more attention to what was before us.