The 1996 short session of the Legislature is expected to consider an amendment to G.S 45-37 the primary objective of which is to bring back cancellation by exhibition and to correct the lack of a line for the date of satisfaction on the statutory form for the affidavit of lost note under G.S. 47-46.3. The proposed amendment resurrecting exhibition cancellation would require that the endorsement of satisfaction on the original instrument contain a statement of ownership by the endorser. Additionally, the amendment, if adopted, would eliminate the responsibility of the Register of Deeds to ascertain the authority of the endorser as was the case under the repealed provisions of the old statute.

The 1995 amendment coupled with the proposed 1996 changes should facilitate cancellation and ease the difficulties created by the increased difficulty in tracking documents in today’s business environment. Additionally, the new amendment will restore the language permitting cancellation of an instrument that secures performance of an obligation other than a note. However, the practical effect will be, ultimately, that cancellations will simply be an administrative and non-discretionary process. There will be no requirement that the satisfaction be made by the proper party but rather that the correct form of satisfaction be used and any documents required to be acknowledged are done so properly. Such is presently the case with deeds where the Register of Deeds is required to pass on the proper acknowledgment of an instrument but not whether the grantor actually owns the interest conveyed. This is not a problem under the Conner Act but G.S. 47-17.2 codifies the rule that an assignment of a deed of trust need not be recorded.

While time and space considerations require us to postpone a discussion of the case law until a future article, suffice it to say that, our appellate courts have ruled that in limited circumstances a cancellation may not always be relied upon and the statute itself does not speak to the effect of cancellation. We have a concern for the potential for an adverse decision under the new statute as it exists and more so if the proposed amendment passes. A party without any authority, apparent or otherwise, can cancel a deed of trust with or without the original instruments under the statute as proposed. It would seem likely that our courts would rule that such a cancellation is not effective and cannot be relied upon in the right fact situation ( such as where a recorded assignment exists and the assignor cancels ).

Because of this concern we have suggested to Bill Campbell, of The Institute of Government, that the amendment include the following language;

"When an instrument is canceled of record pursuant to this Article the cancellation shall be deemed effective unless the party relying on the cancellation shall have prior actual knowledge of fraudulent, improper or unauthorized cancellation."

Bill has been instrumental in working on the draft of the proposed amendment and should be contacted if you have concerns regarding the changes. From an underwriting perspective we are taking the position that, unless the title examiner has knowledge of or suspects an improper cancellation, the cancellation of record is just that and may be relied upon.