NationStar Mortg. LLC v. Curry (18-351) 11/6/2018
Secured Lender Not Named Party to Estate Sale of Real Property
Chris Burti, Vice President and Senior Legal Council

In 2011, Eulala W. McNeil, now deceased, owned two tracts of land in Wilkes County ("the Property") when she obtained a loan from Sidus Financial, LLC ("Sidus") secured by a properly recorded deed of trust with a proper chain of assignments to Champion. The executrix of McNeil's estate filed a petition ("the Petition") to seek a sale of the Property in order to repay the debts of the estate and filed an amended petition ("the Amended Petition"), adding Metlife, Sidus, and "HUD" as additional respondent parties. "Neither petition named Champion in the caption of the case. However, both the Petition and Amended Petition described Champion's Deed of Trust on the Property as a debt of the estate. Specifically, the Petition stated one of the debts of the estate was '[t]he previously stated reverse mortgage owed to Champion Lender in the current amount of $66,988.86' and petitioner prayed for the court to 'sell [the Property] in order to create assets to pay the taxes and above referenced debts of the Estate."

The attorney of record in the Special Proceeding, filed an affidavit of service by certified mail, had served Champion and also attached a copy of the signed receipt, which showed that Champion had timely received the documents. The Clerk of Superior Court entered an order ("the Order of Sale") authorizing the sale of the Property. The Order of Sale specifically listed Champion's mortgage as one of the debts of the estate and asserted the Clerk's conclusion that the Property should be sold to create assets to pay "the above referenced debts of the Estate." Pursuant to this Order of Sale, the appointed commissioner noticed of sale ("the Notice of Sale"), which included the following statements: "This sale is subject to ad valorem taxes and such other liens as may appear of record[,]" and "[t]his sale is made subject to all prior liens and encumbrances, and unpaid taxes and assessments."

The sale of the Property was properly conducted; the upset bid period expired; the final bidder purchased and paid for the Property; the deed was recorded, the net proceeds were disbursed to the executrix; who then embezzled the money and failed to apply the sale proceeds to satisfy the outstanding balance owed to Champion.

Champion filed a complaint seeking a declaration that its Deed of Trust was a first lien on the Property and seeking judicial foreclosure. The Currys answer alleged that, by operation of collateral estoppel, the Special Proceeding Order of Sale barred Champion's claims and seeking a declaration that Champion's lien was extinguished by the sale of the Property in the Special Proceeding and their payment of the purchase price. The trial court entered judgment on the pleadings in favor of the Currys on both issues. The trial court's order decreed that "Champion Mortgage is collaterally estopped from seeking a judicial sale of [the Property]" and) the "Curry[s] hold title to [the Property] free and clear of the lien of [Champion's] Deed of Trust."

We need not reach the issue of whether Champion was collaterally estopped from seeking a judicial sale of the Property. Because Champion was on notice of and was a party to the Special Proceeding, the Currys acquired the Property free and clear of Champion's Deed of trust.

Champion contended that the trial court erred by concluding that it was a party bound by the orders and judgment asserting: "[i]n the absence of a summons and a petition naming, and properly served on, Champion, it could not have been a party to the Special Proceeding." The opinion goes on extensively before concluding that the Affidavit of Service and Champion's own pleadings raised a presumption of proper service that Champion failed to rebut.

Champion also asserted that it was not a party to the Special Proceeding because it was never identified in the caption of either the Petition or Amended Petition. The Court of Appeals disagreed. In reaching this decision, the Court distinguished Roberts v. Hill, 240 N.C. 373 (1954) quoting:

In Roberts v. Hill, ... the plaintiff named a defendant in the complaint's caption, but failed to make any allegations against that defendant in the body of his complaint. Our State Supreme Court directed the defendant's name be stricken from the complaint since there were no allegations against that defendant. Here, as in Roberts, Plaintiff fails to make any allegations against Keating in the body of his complaint, in addition to failing to name Keating in his complaint's caption.

...and stating: "The facts here are readily distinguishable from both Lee and Roberts. Although neither petition named Champion as such in the caption, the body of both the Petition and Amended Petition described Champion's Deed of Trust mortgage, listed the amount owed to Champion on this mortgage, and stated the Property should be sold to pay off Champion's debt. Because the body of the Petition and Amended Petition alerted Champion to the nature of the Special Proceeding and asserted allegations specifically naming Champion, the mere failure to include Champion's name in the caption is not fatal." (citation omitted)

The Court of Appeals was also not convinced by Champion's argument that the trial court erred by granting judgment declaring the Special Proceeding had extinguished Champion's prior recorded lien on the Property. The opinion with appropriate citation observes that: "at the time of the Special Proceeding, legal title to the Property was held by the trustee of the Deed of Trust for the benefit of Champion, and Ray M. Warren, Jr. and Melissa Carlton Holmes held equitable title to the Property, as devisees and executrix under the will of Eulala W. McNeil."

The Court notes that N.C.G.S. Chapter 28A provides that the personal representative of an estate may petition the Clerk of Superior Court to sell a decedent's real property for the payment of debts and other claims of the estate and if any interest is claimed by another person, they may be made a party to the proceeding. Pursuant to N.C.G.S. Section 45-45.3(c), the beneficiary is the proper party not the trustee. However, Champion contended that its lien remained attached to the Property after the Special Proceeding, regardless of whether it was a named party to the proceeding or not. As we have observed previously, the opinion also notes that N.C.G.S. Chapter  28A "does not expressly provide for a sale of real property owned by an estate pursuant to the clerk's order to be free and clear of liens...".

Significantly, the opinion states:

North Carolina's long standing decisional law supports the view that where the lienholder is named as a party to the proceeding and the order authorizing the sale does not specify that the sale is subject to the lien, the property is sold free and clear of the lien to the purchaser. When the purchase price is paid by the purchaser, said lien is transferred to the proceeds of the sale. See Jerkins v. Carter, 70 N.C. 500 (1874); see also Town of Tarboro v. Pender, 153 N.C. 427, 69 S.E. 425 (1910); Moore v. Jones, 226 N.C. 149, 36 S.E.2d 920 (1946); Williams v. Johnson, 230 N.C. 338, 53 S.E.2d 277(1949).

Because the question arises frequently enough, we think the Court's further analysis merits setting it out in full:

In Moore, the administrator of the estate petitioned the court to have real property of the decedent sold to make liquid assets available to pay the following debts of the estate: (1) costs of administration, (2) a judgment docketed against the decedent, and (3) a deed of trust on real property. 226 N.C. at 150, 36 S.E.2d at 921. The trial court ordered the costs of administration be paid first because N.C. Gen.  Stat. § 28-105 (now N.C. Gen. Stat. § 28A-19-6) required personal property to be distributed to the cost of administration before all other debts of the estate. Id. at 150-51, 36 S.E.2d at 921-22.

Our Supreme Court reversed the trial court and held that under section 28-105, the statute dictating the order in which debts were to be paid, related exclusively to the application of personal property, and not the realty. Id. at 151, 36 S.E.2d at 922. The Supreme Court went on to conclude "when the land is sold to make assets the proceeds remain real estate until all liens are discharged and are to be applied to the payment of such liens in the order of their priority." Id.

Champion contends our Supreme Court in Moore "made [it] clear that a lien on property sold to make assets remains after the sale." However, Champion misinterprets this decision. Our Supreme Court in Moore held that when real property, which is burdened by a lien, is sold to make assets, the proceeds must first be distributed to satisfy the lien, rather than being distributed in accordance with the priority set by the statute governing the distribution of funds from personal property. Id.; see also Pender, 153 N.C. at 430, 69 S.E.2d at 426 (holding when the court ordered decedent's real property to be sold, the proceeds must be applied according to the priority of the liens); Williams, 230 N.C. at 345, 53 S.E.2d at 282 (holding when real property is sold to make assets, "the proceeds of the sale retain the quality of real property to the extent necessary to discharge all liens thereon").

Because the trial court had incorrectly applied the priority of payment of the proceeds and was reversed, our Supreme Court in Moore did not address whether the lien would remain on the real estate if the proceeds of the sale were insufficient to pay off the debt. See Moore, 226 N.C. at 152, 36 S.E.2d at 922-23. Nevertheless, Moore supports the position that the lien is transferred to the proceeds of the sale and when payment is made the buyer takes the property free and clear when the lienholder is made a party to the sale.

We find additional justification for this position from our Supreme Court in Jerkins. See 70 N.C. at 501. In Jerkins, our Supreme Court stated the following:

The order of payment of the debts of the decedent is regulated by [statute,] which declares that judgments docketed are in force, have priority to the extent to which they are a lien on the property of the deceased at his death. The extent of the lien is the amount of the judgment, if the land is of greater value, but if the real estate is of less value, the extent of the lien is the value of the land only. Thus, if the value of the real estate is only five hundred dollars, and the personal assets fifteen hundred dollars, and the judgment is for one thousand dollars, the plaintiff would be entitled as a credit, upon his judgment, to five hundred dollars out of the real assets, that is, the value of the real estate, and for the residue of his judgment, he would come in pro rata with other creditors, as to the remaining personal assets.

Id. The precedents of Jerkins, Pender, Moore, and Williams, read and taken together, support the proposition that when a lienholder is joined in a proceeding to sell land to make liquid assets to satisfy debts for a decedent's estate, the lienholder's lien follows the proceeds of the sale and the purchaser of the real estate who paid the purchase price in excess of the lien, takes title free and clear of the lien.

Because Champion was a party to the Special Proceeding, the Court ruled that its lien followed the proceeds of the sale and the high bidder took title to the Property free and clear of the lien. Champion also argued the lien remained because the Order of Sale did not explicitly state the sale was to be "free and clear" and the Notice of Sale included the following language: "This sale is subject to ad valorem taxes and such other liens as may appear of record[,]" and "[t]his sale is made subject to all prior liens and encumbrances, and unpaid taxes and assessments."

The opinion states:

Even if the Order of Sale did not explicitly state the sale of the real property was to be free and clear of Champion's lien, it did specify that "it [was] in the best interests of the Decedent's Estate and for the necessity of paying the Decedent's just debts" to sell the Property "to create assets with which to pay the taxes and the above referenced debts of the Estate." The Order of Sale listed one of these referenced debts as the "mortgage owed to Champion Mortgage in the current amount of $66,988.86[.]"

The Property was sold pursuant to N.C. Gen. Stat. § 28A-17-1 et seq., which allows the administrator to sell both the legal and equitable title and claims of all parties to the proceeding. As concluded above, Champion was a named party to, was served notice of, and bound by the Special Proceeding. The commissioner of the Special Proceeding under the clerk's order had the judicial authority to sell and convey all interests in the Property. Although the Notice of Sale said the sale was subject to prior liens, the substance of the Order of Sale made it clear the proceeds generated from the sale were directed to pay off these liens and debts of the estate.

The malfeasance of the Executrix also presents an issue that comes up occasionally and is worth reviewing the analysis of that issue in this opinion. The defalcation does not change the fact that the last and highest bidder at the sale, paid for the Property and took the Property free and clear of Champion's lien. The opinion quotes Cherry v. Woolard, 244 N.C. 603 (1956): ("[I]t [is] not incumbent upon the purchaser at the judicial sale to see that the money paid for the property was properly disbursed." (citation omitted)). "When the purchaser paid his bid into court, or to its officer duly authorized to receive it, he was relieved of any further responsibility in connection with the interest then being sold." Id. at 613, 94 S.E.2d at 569 (citation and internal quotation marks omitted).

This welcome opinion will add certainty to real property transactions resulting from a personal representative's special proceeding sale to make assets that the current wording of the relevant statutes in N.C.G.S. Chapter 28A implies but does not explicitly state.