6/1/2010 Newsletter and Legal Memorandum (print version)

Senate Bill 1015 introduced by Senator Josh Stein (D-Wake) was considered in the House Financial Institutions Committee on May 25, 2010. The Committee heard from consumer protection attorneys expressing concerns about consumers who have been mislead by unscrupulous people in either installment land contracts, residential leases combined with options to purchase, or foreclosure rescue situations often utilizing the same or similar transaction structures. Their argument is based upon the supposition that many of these consumers are not sophisticated, will engage an attorney to perform a title search on the property. As a result, they often enter into agreements and make payments to parties who do not have title to the property, and they are also often unaware of liens on the property. The bill would prohibit foreclosure rescue schemes involving an expectation of financial gain by the promoter and create remedial rights under Chapter 75.

It would create a new statute (47G) regulating options to purchase contracts executed with lease agreements on residential property. It would require these contracts to be in writing, contain certain specified disclosure information, provide for a 3 day cancellation period, require disclosure of all mortgages and liens against the property, and require the contracts to be recorded on the land records. The bill provides that one cannot sell an option contract unless they hold title to the property and is the mortgagor on the property, or is a licensed real estate broker. A residential lease/option contract that does not comply with the provision of the Chapter is voidable at the option of the vendee.

The bill would also create a new statute (47H) to regulate installment land sales contracts and contracts for deed. The bill would define such arrangements, specifying that those transactions requiring 5 or more payments in addition to the down payment and having the seller retaining title to the property to secure the purchaser's obligations, are covered transactions. It would require the seller to have title to the property. It would require the contracts to be in writing, contain certain required disclosures, provide for a 3 day cancellation period, would require disclosure of mortgages and liens affecting the property, would require the seller to provide the buyer annual account statements, and would require recordation of the contracts.

One concern in the Bill's present form is that it purports to regulate these practices without dealing with, or providing a procedure, for forfeiture. This creates an ambiguity as to whether it supplants the common law requirement for judicial foreclosure of the equity of redemption or supplements the requirement. In light of the confusion created by the opinion in Marantz Piano Co. v. Kincaid, 108 N.C. App. 693, 696, 424 S.E.2d 671, 673 (1993), consideration of this bill would seem to provide an excellent opportunity to clarify and codify a procedure for extinguishing the vendee's equity of redemption in residential land sales contracts and leases with options to purchase. Such a procedure would provide greater certainty with regard to the status of title after default.

Other concerns expressed with the proposed legislation by the Legislative committee of the Real Property Section of the North Carolina Bar Association is that the version under consideration at this writing of the proposed 47G-6(2), contains an exception apparently permitting a realtor to execute a Covered Option Contract to sell property that the realtor does not own. There seems to be no rational reason for this exception and one may assume that its intended purpose is otherwise.

A further issue appears in the proposed 47G-7 which requires disclosure of mortgages to be made by a "separate written disclosure." It seems reasonable to require the disclosure, but it would seem to be sufficient if it were in a separate paragraph in the agreement. It seems that it should also include language disclosing the potential losses that may be suffered if a disclosed lien on the property is foreclosed.

In the proposed 47H-1(6), a purchaser is defined as a person or an entity, but in proposed 47H-1(7) a seller is defined as a person, but an entity is not included in the definition. This creates a loophole as a seller seeking to circumvent the statute could convey the property to a business entity before entering into the contract with the buyer and that contract would not be regulated by this proposed statute. Given that the definition of Property used in this Chapter is a structure being a principal dwelling for the purchaser, an entity cannot be a purchaser.

The Committee also recommended that:

2) 47H-6 (7) would be improved by adding the status of the mortgage (i.e. in default, foreclosure in progress, etc.)

3) 47H-7(a)(2) should require the agreement be in writing.

4) 47H-8 should list a period of time before a late fee can be charged (i.e. 15 days).

Expressing similar concerns with regard to forfeiture, the Committee recommended that the Legislature add provisions allowing for a nonjudicial foreclosure procedure under Chapter 45. As we intimated above, these instruments are viewed by the courts as mortgages. The committee recommends the creation of a process to replace judicial foreclosure which takes an excessive amount of time and adds a great deal of expense to the parties. As Chapter 45 provides a more streamlined process for foreclosures, it would be better to use that process for these instruments.

In both the proposed 47G and 47H, the Committee recommends that if attorney fees are to be assessed, then they should be assessed in favor of the prevailing party, not just the tenant/purchaser. Further, as any violation of these proposed Chapters would constitute an unfair and deceptive trade practice under the new coordinating provisions of Chapter 75, the language needs to be restricted to cover only material violations as the current proposals could be construed to permit technical but non-damaging violations to be prosecuted and sellers find themselves defending unwarranted, unfair and deceptive trade practice claims.

In Fish House, Inc. v. Clarke, COA09-1047, filed on May 18 2010, the North Carolina Court of Appeals has, in effect, created new law in North Carolina by holding that manmade canals are navigable bodies of water in fact and law and the lands under them are subject to the public trust doctrine and held by the State of North Carolina for the benefit of the public. Presumptively, this would apply to manmade lakes, harbors and marinas as well.

The plaintiff and the defendant own adjacent tracts of land in the Village of Engelhard, North Carolina, where they each operate fish houses. A canal called the Old Sam Spencer Ditch (the "Canal") is located on the western border of the plaintiff's property and to the east of the defendant's tract. The evidence in the case is that the defendant consistently allowed boats to enter the Canal and tie up on the western side and that the public has made unobstructed use of the canal for decades for the purpose of navigation. The case arose when the plaintiff sought to establish its rights to control the defendant's continued use of the canal for access to her property. The trial court found that the waters of the Canal are navigable waters in which the State of North Carolina has public trust rights and that neither party has any rights in the waters of the Canal except as members of the public and dismissed the action in its entirety. The plaintiff appealed from this order.

It has been so often said that bad cases make bad law that it has become a legal aphorism. This case may be said to be a prime example of the aphorism. To paraphrase the North Carolina Supreme Court in Gwathmey v. State of North Carolina, 342 N.C. 287, 300, 464 S.E.2d674, 682 (1995) "We imply no criticism here of the able ... court. As we have indicated throughout this opinion, the law involving the public trust doctrine has been recognized by this and other courts as having become unnecessarily complex and at times conflicting." We believe that had the court studied Gwathmey more closely instead of using its often quoted language out of context, they may well have come to a different and more supportable conclusion.

The Court of Appeals quotes Gwathmey as follows "Our Supreme Court has clarified the law on navigability in the context of the public doctrine succinctly: "'"'[A]ll watercourses are regarded as navigable in law that are navigable in fact...'"'" (citations omitted) in a conclusory paragraph that completely misses the issues decided and applies them inappropriately to different facts and issues in the present case. In misapplying Gwathmey the Court points to the frequently quoted phrase attributing the North Carolina Supreme Court where it ""clearly states that the public has a right to unobstructed navigability of waters in their natural state."' This Court then fixes upon and tries to interpret the Supreme Court's intended meaning of the phrase "natural state" without grasping that it is very clear that Gwathmey is purely a land title case involving land that has previously been conveyed out of the State of North Carolina, but conveyed subject to public trust rights when one grasps the issues as applied to the facts in the case. Thus, it is mislead upon a path from a position of applying the existing law applicable in North Carolina to a search for guidance from the South Carolina Supreme Court and from regulations engendered by Division of Coastal Management of the N.C. Department of Environment & Natural Resources.

The opinion states: "We agree with the trial court and Defendant that the Canal, although manmade, is a navigable waterway held by the state in trust for all citizens of North Carolina. This Court recently stated that 'the public ha[s] the right to [] unobstructed navigation as a public highway for all purposes of pleasure or profit, of all watercourses, whether tidal or inland, that are in their natural condition capable of such use.' Bauman, __ N.C. App. at __, 681 S.E.2d at 824 (quoting Gwathmey, 342 N.C. at 300, 464 S.E.2d at 682). The question here is whether the test for navigability is different when applied to a manmade canal. (emphasis added) 'Gwathmey clearly states that the public has a right to unobstructed navigability of waters in their natural state.' Id. at __, 681 S.E.2d at 824-25. However, it is not whether the waterway itself is natural or artificial but, rather, (emphasis added) '[w]ater that is navigable in its natural state flows without diminution or obstruction.' Id. at __, 681 S.E.2d at 825 (citing Wilson v. Forbes, 13 N.C. 30, 35 (1828)).

The Court of Appeals is citing Bauman as supportive of its holding that the test "is not whether the waterway itself is natural or artificial", yet the Bauman Court unequivocally asserts that the "'test' for navigability ... requires a showing that the body of water is navigable by watercraft in its natural condition. 'Natural condition' clearly means without modification at the hands of man. See Fitch v. Selwyn Village, 234 N.C. 632, 635, 68 S.E.2d 255, 257 (1951), (emphasis added) which involved a claim based on attractive nuisance, and in which the Court distinguished between artificial impoundments and streams which flow in their 'natural state.'" The Court of Appeals in Bauman rejected the contention that damming a creek renders it navigable or non-navigable, but rather asserts that the fact of whether the creek in its natural state was navigable solely determines whether it is subject to the public trust doctrine. Applied to the facts in this case, the submerged lands in their natural condition were not covered by navigable waters and were not subject to the public trust doctrine at the time of their conveyance from the state and were clearly conveyed free of the public trust doctrine. Only our judiciary has imposed a trust on this land in this case, not the common law or the legislature by which the Court is to be guided.

Clearly, this Court's interpretation of the law of North Carolina is not what was stated in Bauman or what the Supreme Court in Gwathmey was addressing as applied to the facts of the present case. The Supreme Court was clearly limiting its application of the North Carolina doctrine of navigability to a case "where the parties claimed title to contested lands under grants obtained pursuant to the general entry laws." Where the Court of Appeals errs in applying the doctrine here is in assuming that navigability, in and of itself, requires the application of the public trust doctrine. This is not the case, nor does any case in North Carolina so state. Gwathmey clearly acknowledges the power of the State to convey lands submerged under navigable waters free of the public trust doctrine. "It is true that lands submerged by waters which are determined to be navigable in law are subject to the public trust doctrine. However, the assumption that such lands may not be conveyed by the General Assembly without reservation of public trust rights is incorrect." Gwathmey, Id.

In Gwathmey, title of the State was in issue and as there was no clear grant from the State transferring the land in question expressly free of the public's rights, the conveyances had to be construed to determine the State's intent and the Supreme Court states: "Thus, in North Carolina, the public trust doctrine operates as a rule of construction (emphasis added) creating a presumption that the General Assembly did not intend to convey lands in a manner that would impair public trust rights. 'Unless clear and specific words state otherwise, terms are to be construed so as to cause no interference with the public's dominant trust rights, for the presumption is that the sovereign did not intend to alienate such rights.' RJR Technical Co. v. Pratt, 339 N.C. 588, 590, 453 S.E.2d 147, 149 (1995). However, this presumption is overcome by a special grant from the General Assembly expressly conveying lands underlying navigable waters in fee simple and without reservation of any public trust rights. See Ward v. Willis, 51 N.C. at 185-86." Gwathmey v. State of North Carolina, 342 N.C. 287, 300, 464 S.E.2d674, 682 (1995). It effect, it is also overcome when at the time of conveyance, the property is not submerged or if submerged, the waters are not navigable "in fact or in law".

Thus the navigability doctrine is to be applied solely as a rule of construction to determine whether naturally submerged lands are subject to the public trust doctrine absent title out of the State free of trust. In the present case, it is clear that title passed out of the state free of trust prior to the Canal being dug. There is no precedent cited to the contrary. The court attempts to further support this unsupportable proposition by citing Pine Knoll Assn. v. Cardon, as follows: "this Court stated, without dispute, that "Plaintiff and defendant own adjoining canal front properties on the 'dead end' canal of Davis Landing Canal, which is navigable by pleasure boats," and described the canal as a navigable waterway. 126 N.C. App. 155, 157, 484 S.E.2d 446, 447 (1997)." This citation is in apropos as a careful reading of the case reveals that the parties stipulated to navigability and the public trust doctrine was not in issue in any way. Thus, when the Court of Appeals in the present case asserts that "In light of the preceding authority, we hold that the controlling law of navigability concerning the body of water 'in its natural condition' reflects only upon the manner in which the water flows without diminution or obstruction. Therefore, any waterway, whether manmade or artificial, which is capable of navigation by watercraft constitutes "navigable water" under the public trust doctrine of this state." The Court creates a wholesale reversion to the State if you can float your boat over lands that the owner has submerged.

The North Carolina Supreme Court in Lake Drummond Canal & Water Co. v. Burnham, 147 N.C. 41, 60 S.E. 650 (1908) confirms that the construction of an artificial waterway conveys no right to a lower proprietor, which in the present case is the State of North Carolina. "The doctrine is certainly it is the position supported by the great weight of authority that, where the proprietor of an upper tenement constructs and maintains on his own premises, and for his own convenience and advantage, an artificial waterway, or any artificial structure, affecting the flow of water, and such structure invades no right of the lower proprietor, ... in such case...the lower proprietor [does not] acquire any right which rests only on prescription. An easement arising in that way can only be established by reason of adverse possession, or continuous invasion of another's right. Gould on Waters (3d Ed.) §§ 161-340; 3 Farnham on Waters and Water Rights, pp. 2400-2437; Arkwright v. Gell, 5 M. & W. 202; Mason v. Railway, L. R. 6 Q. B. 577-586; Greatot v. Hayward, 8 Exch. 290...And the decisions of our own court are to like effect. Felton v. Simpson, 33 N.C. 84; Mebane v. Patrick, 46 N.C. 23."

If this overbroad and erroneous decision stands and becomes controlling law, the implications portend a disastrous economic impact for owners of every submerged parcel of property in North Carolina upon which waters have been impounded or flow by reason of manmade changes where it can be said that those waters are navigable in that this opinion creates a wholesale grant of their submerged lands to the State of North Carolina. There are hundreds of owners of boat slips in dozens of manmade marinas and harbors involving hundreds of millions of dollars in investments that will likely become uninsurable and possibly inalienable as a practical matter. To exacerbate the problem, this Court's apparent wholesale rejection of the holding in Bauman, calls into question the title to the submerged lake bottoms of what were hitherto considered private lands under manmade impoundments such as Lake Norman, Lake Lure, Lake Gaston, Lake Hickory and others.

The absence of authority to convert private property rights is addressed in Zagaroli v. Pollock, 94 N.C.App. 46, 379 S.E.2d 653 (1989) "Defendants are correct in asserting that the Federal Power Act vests substantial authority in the power companies who obtain licenses from the Federal Energy Regulatory Commission (FERC) to operate hydroelectric dams. Duke Power is such a licensee. However, the Federal Power Act did not abolish private proprietary rights. Federal Power Comm. v. Niagara Mohawk Power Corp., 347 U.S. 239, 250-51, 74 S.Ct. 487, 494, 98 L.Ed. 666, 676 (1954). Although a FERC licensee may exercise the power of eminent domain over lands which will make up the bed of a lake associated with a hydroelectric dam, 16 U.S.C. Section 814, neither Duke Power nor its predecessor in title took the land in question by eminent domain. Without the exercise of the power of eminent domain, on this record Duke Power and its predecessor in title obtained nothing more than a flooding easement over land owned by plaintiff. Under the Federal Power Act Duke Power may place limitations on the landowner's use of his property in accordance with federal law. However, the Federal Power Act does not give Duke Power the authority to grant defendants the right to use plaintiff's property without the assent of the plaintiff. To hold otherwise would in effect authorize the taking of property without just compensation." (emphasis added)

Ironically, the very sources cited by the court leading to its interpretation of North Carolina law point to a less expansive interpretation of law and fact that would produce a like result. The court cites the N.C. Department of Environment and Natural Resources, Division of Coastal Management "in its CAMA [Coastal Area Management Act] Handbook for Development in Coastal Carolina, defines navigable waters and identifies the various public trust areas. The handbook identifies public trust areas as, inter alia: (1) "all navigable natural water bodies and the lands underneath;" (2) "all water in artificially created water bodies that have significant public fishing resources and are accessible to the public from other waters;" and (3) "all waters in artificially created water bodies where the public has acquired rights by prescription, custom, usage, dedication or any other means." (emphasis added) The prescriptive rights described in the handbook are grounded in sound legal analysis. That prescriptive use by the public may create public ways has been recognized under North Carolina common law. Tarkington v. McRea, 47 N.C. 47 and Wright v. Lake Waccamaw, 200 N.C. 616, 158 S.E. 99 (1931). The court recites the following facts it shares from the record in the case: "Here, there is no dispute that boats with a length of thirty (30) feet have navigated the Old Sam Spencer Ditch or that Defendant and other members of the public have used the Canal for commercial purposes in excess of twenty (20) years." The court could have simply remanded the case to determine if such use had created prescriptive rights.

The Court's discussion of the South Carolina case of Hughes v. Nelson, 303 S.C. 102, 399 S.E.2d 24 (1990), contains similar qualifying language where it observes: "Accordingly, the court in Hughes concluded that the canal which was privately constructed to connect with a navigable river, had the capacity for navigation, and had indeed been navigated for the past fifteen years without exclusion of the public (emphasis added) was navigable water." This fact may have been critical to the South Carolina court. Interestingly enough the Court of Appeals states: "The court in Hughes held that '[t]he fact that a waterway is artificial, not natural, is not controlling. When a canal is constructed to connect with a navigable river, the canal may be regarded as a part of the river... (internal citation omitted) State v. Columbia Water Power Co., 82 S.C. 181, 186, 63 S.E. 884, 887 (1909) (stating that a canal constructed to improve the navigability of two navigable rivers becomes 'a part of those rivers, and therefore navigable just as any other portion of them is navigable'". With nothing in the quoted text suggesting that the right to use the surface waters equates with public trust rights in the bottom, we are left to question whether this court's inference is correct, much less necessary. In fact, a careful reading of the case shows that the only issue addressed by the South Carolina Supreme Court was the "use" of the canal and not the ownership of the bottom. Further in the Columbia case the canal was constructed at the expense of the State of South Carolina. A closer look at the cases cited by that court leads to the statement by the South Carolina Supreme Court in State v. Columbia Water Power Co., which was quoted in Hughes that "a stream not naturally navigable, but made so by artificial means, is not navigable water in a legal sense."

All of which leads us to the point that the right to use the canal is not dependant solely upon the ownership of the bottom, a principle which has been long established under North Carolina common law. Justice Clark, in his dissenting opinion in Hutton v. Webb, 124 N.C. 749, 33 S.E. 169 (1899) states: "In State v. Glen, 52 N.C. 321, it is said that, 'when a stream (not navigable) is naturally of sufficient depth for valuable floatage, the public have an easement therein for the purpose of transportation and commercial intercourse, and in fact they are public highways by water'; this easement being explained to be as to the use of the stream for said purposes, the bed of the stream, and with it the right of fishing being capable of grant to the riparian owners.". Thus, the Court of Appeals could have simply ruled concerning the right of the defendant to use the Canal without requiring any such dubious construction of the public trust doctrine and ownership of the submerged lands. This is particularly applicable as it appears that there was evidence before the trial court that the deeds of the parties may have gone to the center of the Canal.

The Court's holding here can be analogized (with a touch of hyperbole) to a declaration that all driveways are owned by the State of North Carolina because they are connected to public highways and the public can travel on them unimpeded. Application of the public trust doctrine was not at all necessary to the resolution of this case. We understand that a petition seeking discretionary review is being filed in this case. If the North Carolina Supreme Court does not remedy the problems that will be created by this opinion, its overbroad application may well require a legislative cure if it is not to result in a wholesale disruption of the substantial portion of our State's economy that is dependant upon certainty of title to land that has been submerged by the voluntary actions of its owners.

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