In Re George, NC Supreme Court, 77A19, 4/16/21
Effect of Insufficient Notice in HOA Foreclosure
Chris Burti, Vice President and Senior Legal Counsel

This appeal began as the result of the foreclosure of a Claim of Lien filed by a homeowners' association. The Supreme Court resolves the issue of whether the trial court erred in concluding that the foreclosure was invalid, that the two sequential purchasers, one the high bidder at the N.C.G.S. Chapter 45 foreclosure sale and the subsequent purchaser from the high bidder, were not good faith purchasers for value and that their conveyances were void.

The property owners filed a motion for relief from a foreclosure order and the trial court determined that the transfers to the high bidder and then to the subsequent purchaser should be declared null and void because the court had no jurisdiction over one of the property owners due to insufficient notice and deficient service of process. The trial court, at a second hearing, determined that the subsequent purchasers were not good faith purchasers for value entitled to the benefit of the protections afforded to subsequent good faith purchasers for value. On appeal, the Court of Appeals held that, even though the initial foreclosure order had been invalid on the grounds of insufficient notice, the property owner had received "constitutionally sufficient" notice and that both of the sequential purchasers were entitled as good faith purchasers for value to the protection of N.C.G.S. Section 1-108. The Supreme Court affirmed in this opinion that the foreclosure was invalid, but ruled that the trial court had not abused its discretion in determining that the purchasers were not protected by the statute and that the deeds were void. The Supreme Court also ruled that the trial court had erred in failing to determine whether they were entitled to an order of restitution, remanding the case to the Superior Court to determine "the extent, if any, to which an order of restitution should be entered pursuant to the applicable law."

Factually, the foreclosed property owners lived in St. Croix in the United States Virgin Islands and their daughters lived in the property while attending school in North Carolina. In 2016 the HOA filed a claim of lien against the property relating to unpaid homeowners' association fees in the amount of $204.75. The owners failed to pay this amount and the trustee for the HOA filed a notice of foreclosure hearing. The HOA attempted to serve notice of foreclosure in a variety of ways, including regular and certified mail, return receipt requested, directed to the St. Croix address listed on the owners' deed and regular and certified mail to the address of the property. The HOA was not successful effecting service through the use of the mails because there was no mail receptacle at the St. Croix address and the Charlotte address receipts were never returned.

The opinion states:

In addition, the Association attempted to effectuate personal service upon the Georges at the Charlotte property. On 12 October 2016, Deputy Sheriff Shakita Barnes of the Mecklenburg County Sheriff's Office personally served the notice of foreclosure upon a woman who identified herself as Hygiena Jennifer George at the Charlotte property and completed returns of service in which she stated that she had personally served Ms. George and that she had served Mr. George by leaving copies with Ms. George, a person of suitable age and discretion who resided at Mr. George's dwelling house or usual place of abode. The person upon whom Deputy Barnes actually effectuated service was, however, the Georges' eldest daughter, Jeanine George, who had claimed to be Ms. George at the time that she was served with the notice of foreclosure by Deputy Barnes. On 13 October 2016, the trustee filed the returns of service completed by Deputy Barnes and an affidavit indicating that the Crossings Community Association had unsuccessfully attempted to serve the Georges by mail.

KPC Holdings purchased the property at the foreclosure sale for $2,650.22 and subsequently sold the property to National Indemnity Group, with the sale secured by a promissory note and deed of trust for $150,000.00. The owners claimed to have had no notice of the unpaid HOA fees and foreclosure proceeding until 2017, when one of their daughters called them reporting that they had been ordered to vacate the property. They subsequently filed a motion pursuant to N.C.G.S. Section 1A-1, Rule 60(c), seeking to void the order of foreclosure and all other related proceedings claiming that they had not received the notice that was statutorily required in foreclosure proceedings, that the return of service completed by the Sheriff's deputy was erroneous, and that the order authorizing the foreclosure sale and the subsequent conveyances should be vacated.

The record recited reflects that the testimony of the purchaser before the trial court was:

"...that she had purchased the property from KPC Holdings after having driven past the property and having conducted on-line research that included an inspection of the applicable property tax payment and prior foreclosure records. Among other things, Ms. Schoening testified that she had learned from the public record that the Georges had purchased the property at a previous foreclosure sale for an amount in excess of $130,000.00 and that, at the time of the foreclosure that was at issue in this case, they owned the property free and clear of any indebtedness, with the exception of the $204.75 amount that was allegedly owed to the Association. In addition, Ms. Schoening testified that her purchase of the property had been secured by a note and deed of trust in the amount of $150,000.00 that was payable to KPC Holdings, that she had invested approximately $50,000.00 in the course of renovating the property as of the date of the hearing, and that she planned to sell the property for $240,000.00 after it had become 'retail ready.'"

The trial court concluded that the owners had not been properly served with the notice of foreclosure as the property was not their dwelling or usual place of abode, that the foreclosure sale had proceeded despite the lack of personal jurisdiction with the result that the foreclosure sale and subsequent conveyances should be invalidated. The court granted the motion for relief and declared the deeds transferring the property to be null and void.

Purchasers, National Indemnity and KPC Holdings gave notice of appeal to the Court of Appeals from the trial court's order and then "filed a motion for relief from judgment pursuant to N.C.G.S. Section 1A-1, Rule 60(b)(6), in which they requested the trial court to vacate the earlier order granting the Georges' motion for relief from judgment on the grounds that they were both good faith purchasers for value and that the Georges had received constitutionally sufficient service of the notice of foreclosure in accordance with the Court of Appeals' 2017 decision of In re Ackah, 255 N.C. App. 284 (2017), aff'd per curiam, 370 N.C. 594 (2018)"

The trial court denied the latter motion concluding that neither KPC Holdings nor National Indemnity qualified as a good faith purchaser for value for purposes of N.C.G.S. Section 1-108 leading to the appeal to the Court of Appeals where these arguments were made again. The Court of Appeals agreed that the trustee had failed to properly serve the notice of foreclosure as required by Rule 4, and concluded that "the trial court correctly determined that the foreclosure sale was void due to lack of personal jurisdiction..." With respect to the argument advanced by KPC Holdings and National Indemnity that they both qualified as good faith purchasers for value entitled to the protections of N.C.G.S. Section 1-108, the Court of Appeals observed that, if "a judgment is set aside pursuant to Rule 60(b) or (c) of the Rules of Civil Procedure[,] . . . such restitution may be compelled as the court directs," with "[t]itle to property sold under such judgment to a purchaser in good faith . . . not [being] thereby affected."

It is important to note that it appears that the facts of the case compelled the Court of Appeals to observe, and as the Supreme Court opinion states that:

...a party qualifies as a good faith purchaser for value for purposes of N.C.G.S. § 1-108 when it "purchases without notice, actual or constructive, of any infirmity, and pays valuable consideration and acts in good faith," id. at 49 (quoting Morehead v. Harris, 262 N.C. 330, 338 (1964)), with this Court's decision in Swindell v. Overton, 310 N.C. 707, 713, (1984), serving to establish that a gross inadequacy of purchase price is insufficient, in and of itself, to support a determination that a subsequent purchaser of foreclosed-upon property did not act in good faith. In re George, 264 N.C. App. at 49.

The argument of inadequate consideration is compelling, but the Court of Appeals concluded that while it may occasion the provision of financial relief, it doesn't compel a voiding of title. This Supreme Court opinion notes:

In resolving this aspect of the challenge lodged by KPC Holdings and National Indemnity to the trial court's indicative decision, the Court of Appeals relied upon In re Ackah, 255 N.C. App. at 288, for the proposition that, even though a property owner cannot normally be divested of his or her property without sufficient notice, he or she can be deprived of the property in question as the result of a foreclosure sale if he or she had "constitutionally sufficient notice" of the pendency of the foreclosure proceeding and the subsequent purchaser was a good faith purchaser for value for purposes of N.C.G.S. § 1-108. In re George, 264 N.C. App. at 52. In the Court of Appeals' view, In re Ackah held that "constitutional due process does not require that the property owner receive actual notice" and that, "where notice sent by certified mail is returned 'unclaimed,' due process requires only that the sender must take some reasonable follow-up measure to provide other notice where it is practicable to do so." Id. at 50 (quoting In re Ackah, 255 N.C. App. at 288).

A majority of the Court of Appeals applied these principles to the facts of this case by holding that KPC Holdings was a good faith purchaser for value and that the trial court had erred by vacating the foreclosure sale and subsequent transfer from the trustee to KPC Holdings.2 In re George, 264 N.C. App. at 52. In concluding that KPC Holdings was entitled to good faith purchaser for value status, the Court of Appeals noted that:

No record evidence exists that either KPC Holdings or National Indemnity had actual knowledge or constructive notice of the improper service of the foreclosure notice. No infirmities or irregularities existed in the foreclosure record that would reasonably put KPC Holdings or any other prospective purchaser on notice that service was improper. The sheriff's return of service indicated that personal service was made upon [Ms.] George and that substitute service was accomplished for Calmore George by leaving copies with [Ms.] George. KPC Holdings was entitled to rely upon that record in purchasing the property at the foreclosure sale.

In re Ackah doesn't leave the foreclosed property owner without recourse as the case made it clear that the foreclosing HOA may be liable to the owner for restitution in failing to complete the foreclosure in compliance with state law. This may have swayed the majority judges. In his dissenting opinion, Judge Bryant concluded that neither purchaser qualified as good faith purchasers for value for purposes of the statute recognizing that a "gross inadequacy of consideration, coupled with another inequitable element," even though neither, standing alone, may be sufficient for the purpose, will induce a court of equity to interpose and do justice between the parties... (citation omitted). The Supreme Court opinion discloses that the dissenting opinion notes that "exceedingly low purchase price at which the property had been purchased from the trustee and the lack of proper notice to the Georges sufficed, when taken in combination, to support the trial court's decision to vacate the underlying foreclosure order and the resulting property transfers."

Of significant concern to title examiners the opinion observes that:

"In seeking to persuade us to uphold the Court of Appeals' decision, KPC Holdings argues that, when a purchaser lacks actual notice of a defect in the underlying foreclosure proceeding, it "may rely on the facial validity of the record in determining that there are no defects in title to the land in question," citing Goodson, 145 N.C. App. at 363. In addition, KPC Holdings asserts that a foreclosure proceeding, including service of process, should be presumed effective when "the return shows legal service by an authorized officer, nothing else appearing," quoting Harrington v. Rice, 245 N.C. 640, 642 (1957). In view of the fact that the return of service completed by Deputy Barnes indicated that the notice of foreclosure had been personally served upon Ms. George, KPC Holdings argues that it "was entitled to rely on the record's facial validity to purchase the Property with the highest bid at the nonjudicial foreclosure sale."

While this is a compelling argument, the Supreme Court opinion notes:

A careful analysis of our prior decisions relating to the issue of when a party to a foreclosure sale is and is not entitled to good faith purchaser for value status demonstrates that, in order for a subsequent purchaser to be denied access to the benefits that are otherwise available to good faith purchasers for value, the record must show the existence of some additional irregularity or defect in the proceedings leading to the challenged foreclosure sale in addition to an inadequacy of the price that was paid by the purchaser. Although KPC Holdings and National Indemnity argue that no such additional procedural defect exists in this instance given that they were entitled to rely on the facial validity of the return of service completed by Deputy Barnes, which indicated that service had been effectuated upon the Georges by personal service upon Ms. George and that the trial court had no justification for concluding that either subsequent purchaser had actual or constructive notice of any other irregularity or defect in the sale, we do not find these arguments persuasive...

In coming to that conclusion the Supreme Court delved deeply into the "weeds" of the facts of the case, but since it appears that the strictly factual analysis led the Court to conclude that the trial court had not abused its discretion in allowing the equitable relief, it will little serve for us to delve so deeply here as well. We would heartily commend a review of the facts and the Court's application of the case law to those facts for anyone contemplating litigation. Suffice it to say that the Court deemed the record sufficient to support the trial court's order. For our purposes, we would advise title examiners to closely examine the procedural record of all foreclosures, but in particular those which disclose an unseemly low purchase bid should be examined minutely and any discrepancies analyzed closely. The opinion observes:

Although the return of service completed by Deputy Barnes indicated that Mr. George had been served when a copy of the notice of foreclosure was delivered to a person of suitable age and discretion at his "dwelling house or usual place of abode," the deed by which the Georges obtained title to the property showed that they resided in St. Croix. In addition, the affidavit that the trustee executed for the purpose of establishing that valid service had been effectuated upon the Georges indicated that, even though copies of the notice of foreclosure had been sent to them using both regular and certified mail, return receipt requested, at their St. Croix address, neither of these mailings had reached their designated recipients. Thus, there was ample basis upon the face of the record for questioning whether the delivery of a copy of the notice of foreclosure to someone other than Mr. George at the Charlotte property constituted valid service upon Ms. George.(emphasis added)

As to the relief granted by the trial court this opinion notes that N.C.G.S. Section 1A-1, Rule 60(b), allows relief from a final judgment on a number of different grounds, including instances in which "[t]he judgment is void" or "[a]ny other reason justifying relief from the operation of the judgment" exists. The authority granted to a trial judge "is equitable in nature and authorizes the trial court to exercise its discretion in granting or denying the relief sought." Howell v. Howell, 321 N.C. 87, 91 (1987) (citing Kennedy v. Starr, 62 N.C. App. 182 (1983)). However, the Supreme Court determined that "the trial court did err by failing to consider the issue of whether, given its decision to invalidate the results of the foreclosure proceeding and the resulting property transfers between the trustee, KPC Holdings, and National Indemnity, an order requiring the payment of restitution as authorized by N.C.G.S. § 1-108 should have been entered." This prevents a totally inequitable result where consideration has been paid by the purchasers.