This month's installment of Tales from the Dirt looks at the doctrine of merger with respect to the security and fee interests in real property.

Billy Bob Hayes had been hit hard by the slowdown in the economy.  His business ventures had all gone bust except for one, Vavoom Ventures, LLC.  His house was in foreclosure, and he had a pending lawsuit against him that he figured he was going to lose the way his luck had been running.   One of his top products Oxibrite, a tooth whitener, had turned out to be Oxiblight, tooth loosener.  He still owned a nice piece of land that he had inherited from his family and which he wanted to remain in the Hayes family.  Since his wife left him for a circuit rodeo rider, he wasn't able to title the property by the entireties. 

One evening an idea popped into his head, as they often did, while he was driving home.  He had seen how deeds of trust in first lien position wiped out judgments and other liens below it in foreclosure.  Yes, he had seen this first hand with land he had owned that was foreclosed on.  The next day he logged on to www.legalfools.com and downloaded a mortgage form and filled it out and took it down to the courthouse and filed it.  Now when that big judgment materialized he would be protected because it would be behind the mortgage that he had filed and he would be able to foreclose and wipe it out. 

On the mortgage instrument that Billy filled out the borrower was Billy Hayes and the beneficiary was listed as Billy Bob Hayes.  The debt was for $200,000.00. 

A few months later when the lawsuit against Billy rendered a judgment, he began foreclosure proceedings on the mortgage he placed on his land.  The judgment creditor's attorney raised two objections.  The first was that since Billy had not used a deed of trust form, the lien was invalid.  The second objection was on the doctrine of merger, because Billy was both the borrower and beneficiary. 

The court rejected the first argument reciting case law that permitted mortgage instruments to be used in North Carolina, although the deed of trust model was preferable as it allowed for foreclosure under power of sale by a trustee.

With respect to the second objection, the court noted that unless the mortgagor was not personally liable for the debt, a merger of interests occurs whenever the grantor of the mortgage is also the beneficiary and the land will become discharged from the lien of the mortgage.

There is an interesting twist courts have applied to this doctrine where an owner acquires a mortgage that affects his land and for which he is not personally responsible for.  In that instance, the rule in North Carolina is that the intention of the holder of the two interests controls.  In other words, if the holder of the two interests does not intend for the interests of the lien and fee to merge, then they will not.  See.  Plymouth Fertilizer Co. V. Pitt-Greene Prod. Credit Assn 58 NC App 207 (1982).

Now suppose our friend Billy had given a mortgage or deed of trust in favor of Vavoom Ventures, LLC - would the doctrine of merger occur?  Would the LLC be considered an independent entity or the alter ego of Billy?  If not, could the issue of lack of consideration for the lien be raised as a defense to the validity of the lien?