Corporations: Conveyancing and Authority Issues
Chris Burti, Vice President and Senior Legal Counsel

Business entities create additional complexity in real property transactions. They add an obligation to the certifying attorney to confirm that there is appropriate authority for the corporate officers to consummate the transaction. Each corporation is managed by its Board of Directors, normally acting through the agency of the corporation's officers. At times, this additional obligation blurs the lines as to what an attorney must verify in order to certify title.

We should be reminded that title certification of real property transactions has two major aspects. The obvious one involves the certification of the status of the record title. The second, equally important, is the final certification that the necessary parties properly executed the correct documents required to effectuate the transaction, that the necessary consideration has been paid and that the documents were properly recorded and properly indexed. It is in the interplay between these two aspects that we receive many questions that seem to be the result of losing sight of the distinctly different requirements of each.

N.C.G.S. Section 47-18.3 provides a format for a proper execution of corporate conveyances and creates rebuttable presumptions regarding authority and proof.

47-18.3.  Execution of corporate instruments; authority and proof.

(a)       Notwithstanding anything to the contrary in the bylaws or articles of incorporation, when it appears on the face of an instrument registered in the office of the register of deeds that the instrument was signed in the ordinary course of business on behalf of a domestic or foreign corporation by its chairman, president, chief executive officer, a vice-president or an assistant vice-president, treasurer, or chief financial officer, such an instrument shall be as valid with respect to the rights of innocent third parties as if executed pursuant to authorization from the board of directors, unless the instrument reveals on its face a potential breach of fiduciary obligation.  The subsection shall not apply to parties who had actual knowledge of lack of authority or of a breach of fiduciary obligation.

(b)       Any instrument registered in the office of the register of deeds, appearing on its face to be executed by a corporation, foreign or domestic, and bearing a seal which purports to be the corporate seal, setting forth the name of the corporation engraved, lithographed, printed, stamped, impressed upon, or otherwise affixed to the instrument, is prima facie evidence that the seal is the duly adopted corporate seal of the corporation, that it has been affixed as such by a person duly authorized so to do, that the instrument was duly executed and signed by persons who were officers or agents of the corporation acting by authority duly given by the board of directors, and that any such instrument is the act of the corporation, and shall be admissible in evidence without further proof of execution.

(c)       Nothing in this section shall be deemed to exclude the power of any corporate representatives to bind the corporation pursuant to express, implied, inherent or apparent authority, ratification, estoppel, or otherwise.

(d)       Nothing in this section shall relieve corporate officers from liability to the corporation or from any other liability that they may have incurred from any violation of their actual authority.

(e)       Any corporation may convey an interest in real property which is transferable by instrument which is duly executed by either an officer, manager, or agent of said corporation and has attached thereto a signed and attested resolution of the board of directors of said corporation authorizing the said officer, manager, or agent to execute, sign, seal, and attest deeds, conveyances, or other instruments. This section shall be deemed to have been complied with if an attested resolution is recorded separately in the office of the register of deeds in the county where the land lies, which said resolution shall be applicable to all deeds executed subsequently thereto and pursuant to its authority. Notwithstanding the foregoing, this section shall not require a signed and attested resolution of the board of directors of the corporation to be attached to an instrument or separately recorded in the case of an instrument duly executed by the corporation's chairman, president, chief executive officer, a vice-president, assistant vice-president, treasurer, or chief financial officer. All deeds, conveyances, or other instruments which have been heretofore or shall be hereafter so executed shall, if otherwise sufficient, be valid and shall have the effect to pass the title to the real or personal property described therein.

N.C.G.S. Section 47-18.3 (a) is the ‘new' provision for corporate execution that troubles many experienced practitioners.

"Notwithstanding anything to the contrary in the bylaws or articles of incorporation, when it appears on the face of an instrument registered in the office of the register of deeds that the instrument was signed in the ordinary course of business on behalf of a domestic or foreign corporation by its chairman, president, chief executive officer, a vice-president or an assistant vice-president, treasurer, or chief financial officer, such an instrument shall be as valid with respect to the rights of innocent third parties as if executed pursuant to authorization from the board of directors, unless the instrument reveals on its face a potential breach of fiduciary obligation. The subsection shall not apply to parties who had actual knowledge of lack of authority or of a breach of fiduciary obligation."

The presumption is rebuttable and does not protect against breach of fiduciary duty, known or apparent. The classic example is a deed to the corporate president. The presumption of this subsection is qualified by being limited to transactions in the ordinary course of business of the corporation. Lenders, Realty companies, developers, builders and the like routinely transfer land and relying on the presumption should be considered reasonable by an attorney certifying the title record where there is an actual or apparent innocent purchaser for value. The attorney is not entitled to rely on this presumption for authority for the transaction being certified unless prepared to opine that it is in the ordinary course of business of the corporation. This may be obvious, but is easily overlooked in the press of preparing for closing. It is the sort of issue that commends closing checklists to practitioners.

N.C.G.S. Section 47-18.3 (b) is the provision most practitioners are familiar with. It sets out the traditional form of corporate execution. Its presumption is also rebuttable and does not protect against breach of fiduciary duty, known or apparent. However, it is not qualified by being limited to transactions in the ordinary course of business.

"Any instrument registered in the office of the register of deeds, appearing on its face to be executed by a corporation, foreign or domestic, and bearing a seal which purports to be the corporate seal, setting forth the name of the corporation engraved, lithographed, printed, stamped, impressed upon, or otherwise affixed to the instrument, is prima facie evidence that the seal is the duly adopted corporate seal of the corporation, that it has been affixed as such by a person duly authorized so to do, that the instrument was duly executed and signed by persons who were officers or agents of the corporation acting by authority duly given by the board of directors, and that any such instrument is the act of the corporation, and shall be admissible in evidence without further proof of execution.

N.C.G.S. Section 47-18.3 (c) preserves the common law power of "corporate representatives to bind the corporation pursuant to express, implied, inherent or apparent authority, ratification, estoppel, or otherwise." This means that where there is actual authority or ratification pursuant to a proper resolution of the Board of directors of the corporation, the conveyance is valid even where there is no apparent authority or in apparent breach of fiduciary duty. Thus, it might be prudent where corporate property is being conveyed to a corporate officer, director or shareholder pursuant to a proper resolution, that a copy of the resolution, certified by the corporate Secretary, be attached to the deed for the benefit of subsequent title examiners.

N.C.G.S. Section 47-18.3 (e) puts to rest the long-standing debate over whether a corporation may convey property through agents. Since a corporation must always act through agents, many commentators considered the power to appoint agents through a properly drafted power of attorney implicit. Others argued that discretionary powers were non-delegable by corporate officers. This provision resolves the debate if followed scrupulously.

"Any corporation may convey an interest in real property which is transferable by instrument which is duly executed by either an officer, manager, or agent of said corporation and has attached thereto a signed and attested resolution of the board of directors of said corporation authorizing the said officer, manager, or agent to execute, sign, seal, and attest deeds, conveyances, or other instruments. This section shall be deemed to have been complied with if an attested resolution is recorded separately in the office of the register of deeds in the county where the land lies, which said resolution shall be applicable to all deeds executed subsequently thereto and pursuant to its authority."

It also makes it clear that such a resolution is not required when the conveyance is executed by the "usual suspects".

"Notwithstanding the foregoing, this section shall not require a signed and attested resolution of the board of directors of the corporation to be attached to an instrument or separately recorded in the case of an instrument duly executed by the corporation's chairman, president, chief executive officer, a vice-president, assistant vice-president, treasurer, or chief financial officer. All deeds, conveyances, or other instruments which have been heretofore or shall be hereafter so executed shall, if otherwise sufficient, be valid and shall have the effect to pass the title to the real or personal property described therein."

These presumptions render the process of title certification easier in that they remove much of the burden of requiring a title examiner to verify the actual authority for every corporate conveyance in the chain of title. As many corporations are defunct or record poorly maintained, an absolute requirement would be impossible to satisfy.

As alluded to above, transactional certification still requires verification of actual authority and good standing if a business entity is involved in the present transaction or if the title record is missing an essential element entitling the purchaser to the presumptions of the statute. Part of the process of verifying corporate authority is verifying that the corporation is in good standing with the Secretary of State. Fortunately the increase in access to public information via the internet has made this task far easier and much faster. One can now go to the North Carolina Secretary Of State website and pull up a corporation's current standing as well as obtain the most current report filings. The URL is: http://www.secretary.state.nc.us/Corporations/

This information leads to the next areas of discussion; suspension and dissolution. Upon voluntary dissolution, N.C.G.S. Section 55-14-05 applies. This Section provides for the effect of dissolution and the corporate authority after dissolution.

(a)       A dissolved corporation continues its corporate existence but may not carry on any business except that appropriate to wind up and liquidate its business and affairs, including:

(1)       Collecting its assets;

(2)       Disposing of its properties that will not be distributed in kind to its shareholders;

(3)       Discharging or making provision for discharging its liabilities;

(4)       Distributing its remaining property among its shareholders according to their interests; and

(5)       Doing every other act necessary to wind up and liquidate its business and affairs.

(b)       Dissolution of a corporation does not:

(1)       Transfer title to the corporation's property;

(2)       Prevent transfer of its shares or securities, although the authorization to dissolve may provide for closing the corporation's share transfer records;

(3)       Subject its directors or officers to standards of conduct different from those prescribed in Article 8;

(4)       Change quorum or voting requirements for its board of directors or shareholders; change provisions for selection, resignation, or removal of its directors or officers or both; or change provisions for amending its bylaws;

(5)       Prevent commencement of a proceeding by or against the corporation in its corporate name;

(6)       Abate or suspend a proceeding pending by or against the corporation on the effective date of dissolution; or

(7)       Terminate the authority of the registered agent of the corporation.

(c)       After the end of the tax year in which dissolution occurs, a dissolved corporation is not subject to the annual franchise tax unless it engages in business activities not appropriate to winding up and liquidating its business and affairs as permitted by subsection (a).

It is important to note that the real property of the corporation does not devolve upon the shareholders by operation of law upon dissolution as it does in certain other jurisdictions. This requires close adherence to the provision of the statutes dealing with corporate authority after dissolution. This is commonly referred to as winding up authority and is obviously necessary to effectuate an orderly dissolution as there are often matters to attend to and property that may yet need to be disposed of after the dissolution takes effect. The prudent practitioner will often reference this authority and state the supporting factual averments in the premises of a distributive deed of a corporation winding up its affairs.

N.C.G.S. Section 55-14-20 sets forth the grounds for administrative dissolution by the Secretary of State. The Secretary of State may commence a proceeding under G.S. 55-14-21 to administratively dissolve a corporation if: (1) the corporation does not timely pay any penalties, fees, or other payments due. (2) it is delinquent in delivering its annual report; (3)  it fails to maintain a registered agent or registered office in this State; (4) it does not timely notify the Secretary of State of changes in its registered agent or registered office; (5) its stated period of duration expires; or (6) it knowingly fails or refuses to answer interrogatories of the Secretary of State timely, truthfully and fully. Upon reinstatement pursuant to N.C.G.S. Section 55-14-22 following administrative dissolution, it relates back to and takes effect as of the date of the administrative dissolution and the corporation may resume carrying on its business as if the administrative dissolution had never occurred unless someone relies on the dissolution to their detriment.

N.C.G.S. Section 55-14-21(c) provides that the provisions of G.S. 55-14-05 (winding up), 55-14-06 (disposing of or barring known claims), and 55-14-07 (disposing of or barring unknown or contingent claims) apply to a corporation administratively dissolved. It may be best to take the position that a voluntarily dissolved corporation and a corporation administratively dissolved for failure to file reports with the Secretary of State each have authority to wind up because of the clear provisions in N.C.G.S. Section 55-14-05.

However, the provisions in N.C.G.S. Section 55-14-20 authorizing dissolution do not contain the same nullification provisions as in N.C.G.S. Section 105-230.

N.C.G.S. Section 105-230.  Charter suspended for failure to report.

(a)       If a corporation or a limited liability company fails to file any report or return or to pay any tax or fee required by this Subchapter for 90 days after it is due, the Secretary shall inform the Secretary of State of this failure. The Secretary of State shall suspend the articles of incorporation, articles of organization, or certificate of authority, as appropriate, of the corporation or limited liability company. The Secretary of State shall immediately notify by mail every domestic or foreign corporation or limited liability company so suspended of its suspension. The powers, privileges, and franchises conferred upon the corporation or limited liability company by the articles of incorporation, the articles of organization, or the certificate of authority terminate upon suspension.

(b)       Any act performed or attempted to be performed during the period of suspension is invalid and of no effect, unless the Secretary of State reinstates the corporation or limited liability company pursuant to G.S. 105-232.

Thus, N.C.G.S. Section 55-14-05 does not appear to allow the corporation to do anything lawfully until its obligations under Chapter 105 have been satisfied.

Upon reinstatement N.C.G.S. Section 105-232(a) provides that: "Any corporation or limited liability company whose articles of incorporation, articles of organization, or certificate of authority to do business in this State has been suspended by the Secretary of State under G.S. 105-230, that complies with all the requirements of this Subchapter and pays all State taxes, fees, or penalties due from it (which total amount due may be computed, for years prior and subsequent to the suspension, in the same manner as if the suspension had not taken place), and pays to the Secretary of Revenue a fee of twenty-five dollars ($25.00) to cover the cost of reinstatement, is entitled to exercise again its rights, privileges, and franchises in this State. The Secretary of Revenue shall notify the Secretary of State of this compliance and the Secretary of State shall reinstate the corporation or limited liability company by appropriate entry upon the records of the office of the Secretary of State. Upon entry of reinstatement, it relates back to and takes effect as of the date of the suspension by the Secretary of State and the corporation or limited liability company resumes carrying on its business as if the suspension had never occurred, subject to the rights of any person who reasonably relied, to that person's prejudice, upon the suspension. The Secretary of State shall immediately notify by mail the corporation or limited liability company of the reinstatement." This is similar to the reinstatement provisions of Chapter 55 as long as there is a reinstatement. So, proper reinstatement will be critical in instances where the corporation has taken action for which title is dependant during the period of suspension or dissolution.

Where the only issue is that of conveying real property where title is still held in the corporation, N.C.G.S. Section 105-232(a) provides that: "When the articles of incorporation, articles of organization, or certificate of authority to do business in this State has been suspended by the Secretary of State under G.S. 105-230, and the corporation or limited liability company has ceased to operate as a going concern, if there remains property held in the name of the corporation or limited liability company or undisposed of at the time of the suspension, or there remain future interests that may accrue to the corporation, the limited liability company, or its successors, members, or stockholders, any interested party may apply to the superior court for the appointment of a receiver. Application for the receiver may be made in a civil action to which all stockholders, members, or their representatives or next of kin shall be made parties. Stockholders or members whose whereabouts are unknown, unknown stockholders or members, unknown heirs and next of kin of deceased stockholders, members, creditors, dealers, and other interested persons may be served by publication. A guardian ad litem may be appointed for any stockholders, members, or their representatives who are infants or incompetent. The receiver shall enter into a bond if the court requires one and shall give notice to creditors by publication or otherwise as the court may prescribe. Any creditor who fails to file a claim with the receiver within the time set shall be barred of the right to participate in the distribution of the assets. The receiver may (i) sell the property interests of the corporation or limited liability company upon such terms and in such manner as the court may order, (ii) apply the proceeds to the payment of any debts of the corporation or limited liability company, and (iii) distribute the remainder among the stockholders, the members, or their representatives in proportion to their interests in the property interests. Shares due to any stockholder or member who is unknown or whose whereabouts are unknown shall be paid into the office of the clerk of the superior court, to be disbursed according to law. In the event the records of the corporation or limited liability company are lost or do not reflect the owners of the property interests, the court shall determine the owners from the best evidence available, and the receiver shall be protected in acting in accordance with the court's finding. This proceeding is authorized for the sole purpose of providing a procedure for disposing of the assets of the corporation or limited liability company by the payment of its debts and by the transfer to its stockholders, its members, or their representatives their proportionate shares of its assets."

There may be one alternative, but it may not be much quicker or less costly…it just works better when reinstatement is not feasible. The shareholders, as creditors of the corporation, may seek judicial dissolution under N.C.G.S. Section 55-14-30. The North Carolina Department of Revenue and any other creditors will have to be made a party to the proceeding as creditors and be paid, but as the court has the equivalent authority of a receiver, the title can be transferred to the shareholders by court order after debts are settled.

Reverse piercing of the corporate veil is the last issue of concern to the title examiner that we will discuss with regard to corporate conveyances. Normally the doctrine of piercing the corporate veil is used to extend the liability of the corporation to a shareholder, director or officer. "[C]ourts will disregard the corporate form or 'pierce the corporate veil,' and extend liability for corporate obligations beyond the confines of a corporation's separate entity, whenever necessary to prevent fraud or to achieve equity." Glenn v. Wagner, 313 N.C. 450, 454, 329 S.E.2d 326, 330 (1985) (citation omitted). The "instrumentality rule," serves as the basis for disregarding the corporate entity and piercing the corporate veil in North Carolina." The "instrumentality rule" is described as follows in Wagner: "[A] corporation which exercises actual control over another, operating the latter as a mere instrumentality or tool, is liable for the torts of the corporation thus controlled. In such instances, the separate identities of parent and subsidiary or affiliated corporations may be disregarded." Id. (quoting B-W Acceptance Corp. v. Spencer, 268 N.C. 1, 8, 149 S.E. 2d 570, 575 (1966)).

The North Carolina Court of Appeals has taken this doctrine and extended it for the first time to hold that North Carolina law will permit a creditor to reach the assets of a corporation to satisfy the liability of a shareholder if sufficient facts are proven. In Fischer Investment Capital, INC., v. Catawba Development Corporation, COA08-1407, filed on November 3, 2009, the Court of Appeals reversed the trial court's judgment granting the Defendants' motion to dismiss for failure to state a claim for which relief can be granted pursuant to N.C. Gen. Stat. § 1A-1, Rule 12(b)(6). The title examiner must be cognizant of the existence of a risk when title is vested in a grantee of corporation subject to pending litigation when the record suggests the that the grantee is not purchaser for value. While this is not a requirement to be omniscient or to undertake some kind of a super sleuth investigation, it would be prudent to discuss it with your title insurer's counsel should the issue be recognized.

Dirt Tales From the Deed Vault - Episode 32
John Dillard, Vice President and Legal Counsel

This month’s installment of Dirt Tales will take a look at the new North Carolina Land Title Association Mechanics Lien Forms and when it is appropriate to use each form. The new Mechanics Lien Waiver forms were announced over a year ago. And they have been discussed ad nauseam since then. Because of this lead time all of our underwriters are adamant about our approved attorneys using the new forms and existing forms will no longer be acceptable. Since the old forms cannot be used anymore we thought it appropriate to briefly review the new forms and illustrate how easy it is to select the proper form.

The new forms offer several advantages over the old ones. They are standardized so each title company has the same forms. Plus they are copyrighted so that they are not allowed to be modified. Lastly, they contain detailed instructions and a number of well written examples that make it easy to know which form should be used. But to make it easier to understand which form is appropriate this article will look at that question.

The new Mechanics Lien Waiver Forms fall into three distinct categories: NCLTA 1, No Recent Improvements; NCLTA 2, Construction Recently Completed; or NCTLA 3, Waiver and Subordination.

Form 1 is to be used in the typical home purchase situation. A home that has been completed and lived in for some time would fit this category. This form contemplates no improvements have been made or minor improvements, such as those dictated by a home inspector, and they have been paid.

Form 2 is designed to be used for homes that have been recently built. The 120 day lien period may still be open and this form contemplates the possibility of obtaining the joinder of any subcontractors who may have furnished labor and/or materials on the job.

Form 3 is appropriate in situations where there is ongoing construction. In other words, the structure is not completed.  It also contemplates the possibility of obtaining subcontractor’s signatures. This form subordinates the subcontractor’s lien rights to the deed of trust, whereas Form 2 waives the subcontractor’s lien rights.

That’s it! It is now this simple to select the appropriate form to use.