Deeds of Trust

We are frequently asked to give lenders affirmative coverage insuring over apparently minor errors, which may occur in filling out form deeds of trust. Putnam v. Ferguson, 502 S.E.2d 386 (N.C.App. 1998), is a declaratory judgment action in which the plaintiff asked the trial court to determine the priority of the lien of a deed of trust held by plaintiff. This case demonstrates the fact that apparently minor errors may invalidate the lien of a deed of trust.

Plaintiff conveyed a parcel of land to defendant Trustee. Contemporaneously with the delivery of the deed the trustee signed a deed of trust as grantor stating that the "Grantor [Trustee] is indebted to the Beneficiary [Plaintiff] in the principal sum of thirty-thousand and no/100 Dollars ($30,000.00) as evidenced by a Promissory Note of even date herewith the terms of which are incorporated herein by reference." Also, Leslie D. Ferguson and Marilyn M. Ferguson executed a promissory note of even date to plaintiff in the amount of $30,000.00. The note indicated it was given "as seller-provided purchase money for real estate, and is secured by a Deed of Trust which is a first lien upon the property therein described." The trustee did not execute the note.

By deed, Trustee, conveyed the same real property to Leslie D. Ferguson and wife, Marilyn M. Ferguson. On the same day, a subordination agreement dated 2 July 1991 signed by J. R. Dillard, Trustee, and the Plaintiff as creditor, was also recorded. The subordination agreement recited that the debtors desired to borrow from TranSouth Financial Corp., but that the debtors could only obtain the loan upon the condition that the prior deed of trust be subordinated to the TranSouth deed of trust. Also recorded on the same day was a deed of trust dated 22 July 1991, from Leslie D. Ferguson and wife, Marilyn M. Ferguson, to Susan C. Lewis, Trustee, for TranSouth Mortgage Corp. securing $24,476.82.

Leslie D. Ferguson and Marilyn D. Ferguson defaulted on both the TranSouth note and on their obligation to pay plaintiff. TranSouth instituted foreclosure, and plaintiff received notice of the pending foreclosure sale. Plaintiff made no appearance in the foreclosure proceeding. On 25 February 1993, Susan C. Lewis, Trustee, conveyed the property by trustee's deed to TranSouth Mortgage Corp. Subsequently, TranSouth conveyed the property to Franklin Allen Briggs, Jr.

Plaintiff filed a complaint on 23 April 1994, subsequently, defendants moved to dismiss pursuant to Rule 12(b)(6). Plaintiff moved for partial summary judgment on the grounds that there was no issue as to any material fact relating to the validity of the note and deed of trust and that the subordination agreement between plaintiff and defendant TranSouth was invalid.

The trial court denied defendants' motion to dismiss and granted plaintiff partial summary judgment. The trial court concluded that the debt evidenced by the note and deed of trust dated 3 May 1990 secured a valid first lien and that the subordination agreement was invalid. All defendants, except Leslie D. Ferguson and Marilyn M. Ferguson, appealed.

Defendants argued that "since by definition a mortgage is a conveyance of property to secure the obligation of the mortgagor, it is necessary for the mortgage to identify the obligation secured. " Walston v. Twiford, 248 N.C. 691, 105 S.E.2d 62 (1958)(quoting Bradham v. Robinson, 236 N.C. 589, 594, 73 S.E.2d 555, 558 (1952)) (citations omitted).

In this decision the North Carolina Court of Appeals relied on In re Foreclosure of Deed of Trust of Enderle, 110 N.C.App. 773, 775, 431 S.E.2d 549, 550 (1993) to reverse the trial court. The opinion states, "Accordingly, since there was no reference to the Leslie and Marilyn Ferguson note in the deed of trust and there is no evidence that Greg Ferguson as trustee was indebted to plaintiff, defendants argue that plaintiff cannot prevail in her claim that she has a valid lien and her complaint should have been dismissed."

In Enderle, the Court of Appeals determined that "[s]imply put, because the deed of trust did not properly 'identify the obligation secured,' it is invalid." Id. The Putnam court states, "the deed of trust identifies [the trustee] as the debtor, while the promissory note is from Leslie and Marilyn Ferguson. As in Enderle, the deed of trust ‘did not properly "identify the obligation secured."’ Id. Accordingly, the deed of trust is invalid. Since the deed of trust is invalid, plaintiff does not have a valid lien." 502 S.E.2d 386, Putnam v. Ferguson, (N.C.App. 1998)

In the dissenting opinion Judge Walker points to non North Carolina sources for support of the proposition that where the deed of trust sufficiently identifies the existence of a valid debt and contains sufficient information to warrant the introduction of parol evidence so that the deed of trust should not be invalidated on a minor technicality. This is probably the better view. Because of the nature of printed form deeds of trust there probably exists a significant number of deeds of trust on record in North Carolina that are invalid under the holding of the majority. There are countless transactions where the identity of the maker of the note and the grantors of the deed of trust are different. Most printed form deeds of trust contain language similar to the following; ‘this instrument secures a note of even date executed by the borrower’. The majority’s holding would require modification of what amounts to standard printed language nationwide or individual correction and initialing of instruments.

The majority opinion could be described as transactional in that it appears to be reasoned to provide a desired outcome as opposed to promoting a legal policy. The rule applied here is hypertechnical, produces uncertain results and imposes unnecessary burdens on commerce. The only likely benefit of the rule as applied would occur in a foreclosure situation involving multiple notes and an actual uncertainty as to what debt was actually secured. In the instant case the record does not seem to indicate that there was any doubt about what debt was secured. It will be obvious to practitioners dealing with these instruments that this case will probably cause more harm than good since the effect of the rule will be to invalidate legitimate and otherwise valid debts.

From a title insurance underwriting position we will be unable to insure lenders over these types of defects without curing them unless this case is overruled or cured legislatively.