Foreclosure Case Misses Due Process Issue
Chris Burti, Vice President and Legal Counsel

Beneficial Mortgage Co. of N.C. v. Nader Hamidpour, Atlantic Mortgage & Investment Corp., 149 N.C. App. XXX, NO. COA02-269, Filed: December 31,2002

In this Court of Appeals decision, the due process deficiencies of the North Carolina Chapter 45 foreclosure statute were not addressed. Space limitations do not permit us to address all the issues raised in this case. The appellant, Beneficial Mortgage Company held a junior deed of trust on a parcel of real property in Rockingham County that was sold at the foreclosure sale of the senior deed of trust. Beneficial was not provided with notice, did not know of the sale and, therefore, did not bid on the property. Beneficial then sued to quiet title and to collaterally attack the sale. This was an appeal by plaintiff from a grant of summary judgment entered in favor of appellees. The pertinent recitation of facts from the opinion follows.

"On April 26, 1986, Larry Taylor acquired by deed a parcel of property located in Rockingham County, North Carolina, On April 30, 1986, Taylor executed a deed of trust ("Citizens Deed of Trust") in favor of Citizens Savings Mortgage Company ("Citizens") in the amount of $48,450.00, which was recorded in the office of the register of deeds in Rockingham County on May 2, 1986. Citizens subsequently assigned the deed of trust to Atlantic Mortgage and Investment Corporation ("Atlantic")."

"On September 10, 1998, Taylor and his wife executed a promissory note in the amount of $50,000.00 in favor of Beneficial. The note was secured by a deed of trust on the property ("Beneficial Deed of Trust"). The Beneficial Deed of Trust was recorded on September 16, 1998, second in priority to the Citizens Deed of Trust."

"David Craig ("Craig") … substitute trustee of the Citizens Deed of Trust on May 3, 1999… instituted a special proceeding in Rockingham County to foreclose upon the Citizens Deed of Trust. The clerk of court entered an order that Atlantic was entitled to foreclose on the property and, after giving notice, Craig proceeded to sell the property at public sale on October 13, 1999. Atlantic was the high bidder at that sale, with a bid of $16,461.99. However, on October 25, 1999, Household Finance Corporation ("Household") filed an upset bid, raising Atlantic's bid by five percent."

"On the same day that the upset bid was filed, the Taylors filed a voluntary petition in bankruptcy under Chapter 13 of the Bankruptcy Code. The proceedings relating to the foreclosure of the Citizens Deed of Trust were placed on inactive status in accordance with the automatic stay provisions of the Bankruptcy Code pending the outcome of the Taylors' bankruptcy case."

"The Taylors' bankruptcy case was later dismissed, and Craig obtained an order reopening the foreclosure proceedings. A new notice of sale was posted at the Rockingham County courthouse on October 18, 2000, setting the date of the sale for November 7, 2000. Beneficial did not receive notice of the sale. As set forth in Craig's brief, Craig was not aware that Household, who had filed an upset bid at the first sale, was the parent company of Beneficial, nor did Household provide an address on the notice of upset bid filed with the court. Had Beneficial been notified of the sale, it would have been ready, willing, and able to bid $68,979.69 for the property."

"… Nader Hamidpour was the highest bidder, with a final bid of $22,918.90. The period for upset bids closed on December 7, 2000. On December 13, 2000, a trustee's deed conveying the property to Hamidpour was recorded in the Rockingham County register of deeds, and the final report of the trustee was filed January 10, 2001."

"Beneficial filed suit in January 2001 to quiet title and to collaterally attack the foreclosure. All parties moved for summary judgment. On September 24, 2001, the superior court granted summary judgment in favor of the appellees."

Beneficial argued on appeal that the trial court erred in granting summary judgment for the appellees. Their position was that the November 7, 2000 foreclosure sale was improper because the notice of foreclosure sale was not posted for 20 days as required by N.C. Gen. Stat. § 45-21.17(1)(a) and that the sale was conducted on a legal holiday in contravention of N.C. Gen. Stat. § 45-21.23. Further, Beneficial argued that these were material irregularities and resulted in the property being sold for a grossly inadequate price.

The Court of Appeals first analyzed whether the holder of a second mortgage has standing to challenge a foreclosure sale once it is completed. The appellee argued that only a mortgagor has standing to challenge a sale. The Court relying on Gore v. Hill, 52 N.C. App. 620, 620, 279 S.E.2d 102, 103 disc. review denied, 303 N.C. 710 (1981), determined that section 45-21.21 provides procedural protections only for the mortgagor. The Court’s reliance on Gore is misplaced for two reasons. It should be noted that Gore involved a purchaser of property sold at a foreclosure proceeding that argued that the foreclosure was invalid because the trustee had failed to satisfy the notice requirements. The Gore court states that "plaintiff herein, purchaser of the property, was not a party protected by G.S. § 45-21.21 and . . . has no basis on which to assert that the sale was invalid …" This is an obviously correct interpretation of the law as it applies to a successful bidder at a foreclosure sale that desires to repudiate the bid. This Court extends the further statement in Gore that the "procedural requirements of notice and hearing are designed to assure mortgagors that property which they have used to secure an indebtedness will not be foreclosed without due process of law." The Gore Court did not address the issue of the statute’s application to those parties holding by or through the mortgagor. As such, the quoted language is mere dicta with respect to the issue in this case where a junior mortgagee holds a property interest in the land being foreclosed. This Court appears to interpret Gore as limiting the remedies provided by the statute to those parties listed in the statute. Language in an opinion not necessary to the decision is obiter dictum and later decisions are not bound thereby. Muncie v. Travelers Insurance Co., 253 N.C. 74, 116 S.E. 2d 474 (1960); Washburn v. Washburn, 234 N.C. 370, 67 S.E. 2d 264 (1951); State ex rel. Utilities Comm. v. Central Telephone Co., 60 N.C. App. 393, 299 S.E. 2d 264 (1983).

This leads to the second problem with reliance on Gore. The case was decided before the decision in Mennonite Board of Missions v. Adams, 462 U.S. 791, 795, 103 S. Ct. 2706, 77 L. Ed. 2d 180 (1983). In Mennonite, the Supreme Court found that a state statute that allowed for the sale of real property where the payment of taxes was delinquent after a specified period of time was unconstitutional. The statute in that case required only notice by publication and notice to the owner by mail. The statute did not provide for notice to lienholders and, as a result, property could be sold free of all liens and encumbrances without notice to a mortgagee. The Supreme Court stated that "prior to an action which will affect an interest in life, liberty, or property protected by the Due Process Clause of the Fourteenth Amendment, a State must provide notice reasonably calculated, under all the circumstances, to apprise interested parties of the pendency of the action and afford them an opportunity to present their objections." (Internal quotation marks omitted.)

The North Carolina Court of Appeals has already considered G.S. 45-21.16 in light of Mennonite and found it to apply. The case of The Federal Land Bank of Columbia v. Lackey, 94 N.C. App. 553, (1989), was an appeal from summary judgment in a deficiency action against the original mortgagor of a subsequently assumed and defaulted mortgage. The Court of Appeals quoted Mennonite as follows; "‘Notice by mail or other means as certain to ensure actual notice is a minimum constitutional precondition to a proceeding which will adversely affect the liberty or property interests of any party, . . . if its name and address are reasonably ascertainable.’ Id. at 800, 77 L.Ed. 2d at 188. 103 S.Ct. at 2712. [Emphasis in original.]" At issue was the sufficiency of notice by posting but Mennonite made it clear that a mortgagee held an interest entitled to due process.

The issue of whether our foreclosure statute involves sufficient state action to invoke due process rights has been well established since Turner v. Blackburn, 389 F. Supp. 1250 (W. D.N.C. 1975). Turner held that the foreclosure procedures then in force did not comply with the minimum due process requirements of the Fourteenth Amendment and were unconstitutional. The foreclosure statutes then in effect, required that notice be given to persons with an interest in the property only by posting at the courthouse door and by newspaper publication; no personal notice or foreclosure hearing was required. The General Assembly enacted G.S. 45-21.16 in order to meet the minimum due process requirements of personal notice and hearing in response to Turner.

The Court of Appeals determined that Beneficial, as junior mortgagee, is not a party protected by the notice requirements in Chapter 45 of our General Statutes. The Court states that "Section § 45-21.17(4) provides that only those persons listed in N.C. Gen. Stat. § 45-21.16 and those who have filed a request for notice under § 45-21.17A are entitled to notice of sale. Section § 45-21.16(b)(3) specifically excludes holders of deeds of trust--Beneficial-- from those entitled to notice. Thus, Beneficial was entitled to notice only if it had filed a request for notice, which it did not. Because Beneficial is not entitled to notice of sale, as set forth in section 45-21.16, Beneficial has no standing to dispute the adequacy of that notice on appeal. Moreover, our logical conclusion must be that because Beneficial does not have standing to contest the adequacy of notice given in this case, it does not have standing to argue that the sale was held on a holiday in contravention of § 45-21.23." This literal interpretation of the wording of the statute not only ignores the due process requirements of Mennonite; it ignores the substance of existing North Carolina law.

Our North Carolina Supreme Court held in Holley v. White, 172 N.C. 77, 89 S.E. 106, (1916) that judgment creditors and mortgagees of a tenant in common are proper parties to a partition proceeding. It is generally acknowledged that lien creditors have standing to intervene in a partition. This is so because of the clear recognition of the property interest held in the land by a lien creditor. The illogic of the Court’s analysis is emphasized when one considers the status of the title to the land. Under the facts of this case, the trustee of the junior mortgage has legal title to an interest in land that is superior to the interest of the "owner". All that the "owner" holds is a right of possession and an equity of redemption in an equity of redemption. The trustee has legal title in the original equity of redemption. As holder of that title, the trustee may a proper party to contest the issues presented at a foreclosure hearing. Some would argue that the trustee is a necessary party. In Gaither Corp. v. Skinner, 238 N.C. 254, 77 S.E. 2d 659, Chief Justice Devin, speaking for the Court said: "Necessary or indispensable parties are those whose interests are such that no decree can be rendered which will not affect them, and therefore the Court cannot proceed until they are brought in." Foreclosure may well be an extreme and unnecessary application of that doctrine since the junior lienholder can protect its interest if provided proper notice of sale. In either case, the trustee should have standing to petition for redress when notice of sale is not provided, regardless of the language of the statute.

To further illustrate the point, we look to the Court’s final disposition of the issue of standing. The Court states that "Beneficial also argues that it has standing to bring an action to quiet title pursuant to N.C. Gen. Stat. § 41-10 because it claims a competing current interest in the property via the Beneficial Deed of Trust and that the improperly conducted foreclosure sale had not extinguished its interest. We disagree. Section 41-10 allows a person with a claim or interest in real property to bring an action to resolve that claim against others who assert rights or interest in the same real estate. Here, however, Beneficial is not attempting to resolve a situation where both it and Hamidpour have title to the same property. Rather, Beneficial is using § 42-10 to make the same claim that it has been making all along, and we conclude that it does not have standing to do so." This conclusion seems untenable.

In Tower Development Partners v. Zell, 120 N.C. App. 136, 461 S.E.2d 17, (1995) the Court of Appeals ruled that where owners of the road easement, did not receive notice of the foreclosure proceedings their interests were not cut off. Analyzing Tower Development Partners and this case, one can readily imagine a simple set of facts that will produce a legal conundrum. If Beneficial’s mortgage was recorded prior to a subsequent grant of easement by the mortgagor, and the easement holder were not provided notice, the easement holder’s interest would survive the foreclosure. The easement holder would clearly have standing to file a quiet title action against the appellee yet Beneficial loses its interest and has no standing to complain under the holding in this case. It is important to note that the issue of standing is crucial to the outcome of this case. The appellant complained that the foreclosure action was fatally flawed. A party with standing may have an opportunity to have the trustee’s deed voided since a purchaser for value would be deemed to have notice of material procedural defects, such as conducting the hearing or sale on a legal holiday. See, In re Country Lake Enterprises, INC., U.S.B.C., E.D.N.C., Case No. 02-00980-5-ATS.

One may argue that the plaintiff is not entitled to notice under NCGS Sec. 45-21.16 because no request for notice was filed pursuant to NCGS Sec. 45-21.17A. This issue has not been addressed directly in North Carolina, but it has in Louisiana. In Davis Oil Co. v. Mills, 873 F.2d 774 (5th Cir. 1989), the Fifth Circuit Court of Appeals held that a failure to request notice under La. R.S. 13:3886 is not a waiver of due process notice under Mennonite. Small Engine Shop, Inc. v. Cascio, 878 F.2d 883, 890 (5th Cir. 1989) the Fifth Circuit Court of Appeals ruled that La. R.S. 13:3886 does not shift the constitutional burden of notice to the party desiring to be notified. We have extensive guidance on this issue in North Carolina. The first sentence of N.C.G.S. Section 1-44.2(b), creates a presumption that the title to land underlying an abandoned railroad easement is vested in the adjacent property owner if no contrary claim is filed by another person within the statutory one-year period. This provision was ruled unconstitutional in McDonald's Corp. v. Dwyer, 338 N.C. 445, 448, 450 S.E.2d 888, 891 (1994), as applied against record title holders in possession because it does not provide sufficient notice, an opportunity to be heard, and just compensation before divesting owners of a valuable property interest. The Court notes that as "early as 1877, this Court determined that notice greater than that provided by operation of law in the nature of a statute of limitations is required prior to divestment of a vested property interest. See Trustees of the Univ. of North Carolina v. North Carolina R.R. Co., 76 N.C. 103 (1877)." The Court paraphrased and quoted from that decision as follows; "Similar to the statute in Trustees, N.C.G.S. § 1-44.2 not only bars a right of recovery by operation of a statute of limitations, but by operation of a presumption, "transfers [property] to another and enables that other to recover and own it. The [holder] not only loses his property, but by the magic of this [statute] and without consideration received, it is vested absolutely in another." Id. The statute turns a rebuttable presumption into a conclusive presumption which effectively takes defendants' property without affording notice, an opportunity to be heard and just compensation." In addition, the court cites other North Carolina decisions overturning similar legislative provisions. "This Court has found due process violations in several other statutes which, without prior notice, purport to effect a forfeiture of property rights. See Henderson County v. Osteen, 292 N.C. 692, 235 S.E.2d 166 (1977) (statute permitting a judgment on a tax lien and sale without notice held unconstitutional); Eason v. Spence, 232 N.C. 579, 61 S.E.2d 717 (requiring that remaindermen receive notice of foreclosure sale of a life estate and opportunity to be heard); Price v. Slagle, 189 N.C. 757, 128 S.E. 161 (1925) (requiring that defaulting taxpayers receive notice before their land is foreclosed)."

Mennonite has been strictly followed in other jurisdictions. Dutch Point Credit Union, Inc. v. Caron Auto Works, Inc., 36 Conn. App. 123, (1994) holding that a mechanic’s lien statute did not provide notice to lienholders. Teschke v. Keller, 38 Mass. App. Ct. 627, (1995), "The statutory notice of a sheriff's sale … with respect to the interests of a junior mortgagee of real estate whose identity was readily ascertainable on public records and who was neither given notice nor had actual knowledge of the sale, violated the due process clause of the Fourteenth Amendment of the United States Constitution, and the mortgage, although junior to the sheriff's attachment, remained in force after the sale." Detroit v Blake Realty Co, 144 Mich App 432, (1984) land contract vendee with a recorded interest, determined to be entitled to notice of tax foreclosure proceedings where the county records would have revealed the interest in the property and vendee’s address. Central Trust Co., N.A. v. Jensen (1993), 67 Ohio St.3d 140, (1993), defaulting bidder determined to be entitled to mailed notice of sale.

If one assumes that this decision will be reversed by reconsideration or upon discretionary review, one has to consider what its effect will be and what remedies will be available. Space and time limitations do not permit us an in depth analysis. In Sterling v. Block, 953 F.2d 198 (5th Cir. 1992), the Fifth Circuit held that Davis Oil applies retroactively. Since a fundamental right is involved, that seems to be a correct application. In USX Corp. v. Champlin, 992 F.2d 1380, 1384 (5^th Cir.1993), the court felt that the district court's order that the property be resold at private auction was an appropriately tailored remedy. They noted that it "does not completely restore the parties to the status quo, but it does restore the opportunity to bid the property and purchase at the foreclosure sale while avoiding the wastefulness of a second foreclosure proceeding". In the North Carolina appeal, the plaintiff argued that the lien continues as a first lien superior to that of the purchaser. This does not seem to be equitable or logical. The original lien was on the Mortgagor’s equity of redemption. It is that equity of redemption that was not properly extinguished by lack of notice. A better argument can be made that the lien continues but that it retains its character as a lien on the equity of redemption that may still be foreclosed under the junior mortgage. Under general equitable principles, the bidder should step into the shoes of the senior mortgagee and have an equitable lien in the property that is senior to the lien on the equity of redemption. With this type of remedy, if the original high bidders are not successful in the subsequent sale, they will be entitled to the portion of the proceeds representing their purchase price. These bidders are not at fault and fairness requires that their interest be protected.

One would assume that the right to claim relief does not extend into perpetuity. The aggrieved lienholder must seek relief within a reasonable time. NCGS Sec. 45-21.17A should be held to be unconstitutional to the extent that it purports to require a request for notice to preserve constitutional due process rights. It may be argued that it is otherwise valid. To the extent that it imposes limitations on actions to set aside a foreclosure under NCGS Sec. 45-21.17A(f), it appears reasonable. Third party purchasers are protected in North Carolina by the doctrine that a trustee’s sale to third party purchaser for value, without actual notice of a defect, passes valid title. The limitations conform to that doctrine as it applies to third party purchasers. As to the six-month limitation when the mortgagee bids in, it seems very reasonable. In circumstances involving foreclosure of a first lien, the mortgagor is almost universally in default of the junior obligations. In such circumstances, the creditor should be alert to proceedings involving the land and should not be permitted to merely stand on its rights. This provision gives closure and certainty to the proceeding that is merited since there is rarely any equity for a junior lienholder to find worth pursuing. When there is equity a creditor will be sufficiently alert to take timely action as this case demonstrates.