Fifth Third Mortgage Company v. Miller NO. COA09-961

This is an appeal affirming summary judgment in favor of the defendant Branch Banking and Trust Company (BB&T) declaring its deed of trust had priority over the plaintiff Fifth Third Mortgage Company's (Fifth Third) deed of trust encumbering the same property. In 2007, defendant Alan Miller executed and delivered a deed of trust encumbering the subject real property located in Union County to secure a note for the principal sum of $1,177,500.00 to Fifth Third. The deed of trust failed to name a trustee and erroneously described the property as "... Lot 4 in Block 1 of LEACROFT SUBDIVISION...Mecklenburg County Public Registry." Fifth Third recorded the deed of trust in Union County on March 21, 2007.

On June 25, 2007 BB&T filed its deed of trust securing an equity line of credit with a maximum principal amount of $500,000.00 executed by defendants Alan and Phyllis Miller in Union County. This deed of trust contained a description for "...LOT 151 OF MCGEE VALLEY, MAP 1, AKA PROVIDENCE DOWNS SOUTH..."

The Millers defaulted on both loans, BB&T initiated a foreclosure proceeding and Fifth Third "filed a complaint seeking a reformation of Fifth Third's deed of trust to include the correct legal description of the real property, a declaratory judgment, quiet title, a judicial sale, and monetary judgment." The trial court granted a temporary restraining order and preliminary injunction enjoining BB&T from proceeding in the foreclosure action. Subsequently, the trial court granted BB&T's motion for summary judgment, determining that BB&T's deed of trust had priority over Fifth Third's deed of trust. In the appeal, Fifth Third raised two arguments, first, that it was entitled to reformation of its deed of trust and to its priority over BB&T's deed of trust; and, second, that BB&T was not a bona fide purchaser for value without notice of Fifth Third's recorded deed of trust.

Fifth Third's argument that BB&T was not a bona fide purchaser (BFP) was based on a contention that BB&T had constructive notice of Fifth Third's deed of trust. The opinion states that N.C.G.S. Section 47-20 provides that "[n]o deed of trust or mortgage of real or personal property . . . shall be valid to pass any property as against lien creditors or purchasers for a valuable consideration from the grantor, mortgagor or conditional sales vendee, but from the time of registration thereof . . . ." In the construction of our registration laws [our Supreme Court] has very insistently held that no notice, however full and formal, will supply the place of registration. . . . When properly probated and registered, [deeds of trust and mortgages on real and personal property] are constructive notice to all the world. Creditors or purchasers for a valuable consideration from the donor, bargainor or mortgagor, obtain no title as against a properly probated and registered conveyance, sufficiently describing the property. Lowery v. Wilson, 214 N.C. 800, 804, 200 S.E. 861, 864 (1939) (internal citations and quotations omitted) (emphasis added); see also New Home Bldg. Supply Co. v. Nations, 259 N.C. 681, 687, 131 S.E.2d 425, 429 (1963) ("The registration of an improperly acknowledged or defectively probated deed imports no constructive notice and the deed will be treated as if unregistered.") (citations omitted); Cowan v. Dale, 189 N.C. 684, 128 S.E. 155 (1925) (where the registration of a mortgage instrument is defective, the instrument is ineffective to pass title and "may be regarded a nullity as to subsequent purchasers or encumbrancers"). A deed of trust containing a defective description of the subject property is a defective deed of trust and provides no notice, actual or constructive, under our recordation statutes. Lowery, 214 N.C. at 805, 200 S.E. at 864. Implicitly the Court of Appeals ruled that as there was no constructive notice, BB&T was not a BFP

Unfortunately Fifth Third stipulated before trial that the deed of trust it filed "failed to contain a proper description of the real property to be conveyed to the Trustee . . . ." that left it with the argument that its deed of trust should be reformed and enjoy priority position over BB&T. The Court observed that "'[a]s a general rule, reformation will not be granted if the rights of an innocent bona fide purchaser would be prejudiced thereby.' Hice v. Hi-Mil, Inc., 301 N.C. 647, 653, 273 S.E.2d 268, 272 (1981) (citations omitted). They affirmed the trial court's order that BB&T's deed of trust has priority over Fifth Third's deed of trust. The deed of trust is available on line and a review shows that the correct property address was also indicated in the description area of the instrument. Had the plaintiff not stipulated that the description was inadequate as opposed to simply being erroneous, and had the plaintiff argued and the trial court found that the description was sufficient, this case might have had a different outcome as the Court of Appeals was constrained in its ruling by the stipulation.

Ladybird and "Enhanced Life Estate" Deeds

We have presented the following discussion in several presentations and venues, but there appears to be much uncertainty concerning these forms of conveyance, so we include the latest version of our discussion in this edition. The following is brief summary of cases and conclusions concerning the likely efficacy of these instruments in North Carolina. We are not attempting to address the Medicaid or tax implications of these instruments in this discussion in any manner. While there does not appear to be decisive modern authority addressing the validity of these instruments in North Carolina, our common law clearly suggests that they are effective conveyances. The real question seems to be how they will be construed when questions arise as to how the interests vest under unanticipated circumstances.

The Ladybird or "Enhanced Life Estate" deed can be termed a reservation of a special power of appointment that limits how it can be exercised (by deed). Another form purports to reserve a testamentary special power of appointment in favor of certain children and as a reservation of a special power of appointment, it merely limits for whom the power may be exercised. The first example is a power of appointment in gross and the second is a beneficial power of appointment.

The right to grant general powers of appointment in a deed existed under the common law of England and predates the Statute of Wills. The Statute of Wills (32 Hen. 8, c. 1 - enacted in 1540) made it possible for landowners to determine who would inherit their land upon their death by permitting a devise by will. Prior to the enactment of this statute, land passed by descent under the rule of primogeniture if the decedent landowner had competent living relatives surviving him. When a landowner died without heirs, his land escheated to the Crown. The use of a power of appointment in a deed permitted the landowner to circumvent the rule of primogeniture, but unlike a will the deed was not revocable.

As North Carolina initially adopted the common law of England and we know of no cases or statutes to the contrary, these conveyances should be considered valid in North Carolina. N.C.G.S. Section 4-1, adopted in 1778, establishes that the Common law continues to be in force in North Carolina unless superseded.

"All such parts of the common law as were heretofore in force and use within this State, or so much of the common law as is not destructive of, or repugnant to, or inconsistent with, the freedom and independence of this State and the form of government therein established, and which has not been otherwise provided for in whole or in part, not abrogated, repealed, or become obsolete, are hereby declared to be in full force within this State. (1715, c. 5, ss. 2, 3, P.R.; 1778, c. 133, P.R.; R.C., c. 22; Code, s. 641; Rev., s. 932; C.S., s. 970.) "

First Union National Bank v. Ingold 136 N.C. App. 270, (1999) is a will case, but it is predicated upon a trust agreement (which was funded by a deed). The Court of Appeals cites another case, not squarely on point (it deals with a devise of the power to a life tenant in a will) of Howell v. Alexander, 3 N.C. App. 371, (1969) where the court quotes Am. Jur.: "An instrument, such as a deed or will, creating a power of appointment is to be interpreted so as to ascertain the intention of the donor and to give it effect unless some rule of law prevents. Effect should, if possible, be given to every word or clause in the instrument, so long as they are not inconsistent with the general intent of the instrument as a whole." 41 Am. Jur., Powers, § 9, p. 812. Note that this case holds that a general residuary devise operates an exercise of the general power of appointment. However, a general devise is not exercise of special power of appointment unless intent to do so appears, expressly or impliedly from the will, Wachovia Bank & Trust Co. v. Hunt, 267 N.C. 173, (1966).

In Tocci v. Nowfall, 220 N.C. 550 (1942) the North Carolina Supreme Court clearly recognized the power of a grantor to create a power of appointment in a grantee. One has to assume that what interests can be granted can also be reserved if done expressly and clearly. For a case where such a conveyance may have avoided litigation, one should read Roper v. Edwards, 323 N.C. 46, (1988) and the underlying Court of Appeals opinion at 88 N.C. App. 149, (1987). This case always concerns me in this discussion as this type of deed would have avoided the litigation and from the total lack of discussion of reserved powers of appointment, it does not appear as if anyone contemplated one. In Wachovia Bank & Trust Co., N.A., Trustee v. Sevier, 41 N.C. App. 762, (1979) the Court of Appeals quotes the following language: "Where by the terms of the trust it is provided that the income shall be paid to the settlor for life and on his death the income or principal shall be paid to a designated third person, the settlor of course is not the sole beneficiary of the trust. So also where it is provided that on his death the principal shall be paid to his children or to his issue, he is not the sole beneficiary of the trust. This is true even though the settlor reserves a general power of appointment by deed or by will by the exercise of which he could exclude his children or issue. (Emphasis added.) II Scott on Trusts (3d ed.) § 127.1, p. 986-87." As the main issue presented in this case was who had to consent to a judicial revocation of an irrevocable inter vivos trust, the part of the quote applicable to deeds is obiter dicta, but interesting none the less and it supports the efficacy of these deeds.

For citations from other jurisdictions supporting such conveyances see Oglesby v. Lee, 73 So. 840 (Fla. 1917) and Ricketts v. Louisville, St. L. & Ry. Co.,15 S.W. 182 (Ky. 1891). There is a 2007 slip opinion from the New York Surrogate's Court; In Re Estate of Mozer, 15 Misc.3d 1113(A), that upheld such a deed. For cases holding contra, see: Lucareli v. Lucareli, 614 N.W 2d 60, (Wis. App. 2000) and Yordi v. Yordi, 217 P.2d 912 (Kan 1950).

As to the question of whether these conveyances are testamentary instruments requiring the formalities of execution required of a Will, it would seem to be clear that as their development predates the ability to create a testamentary instrument and that the ability to create the same interest in a trust without meeting those requirements clearly answers the question in the affirmative. It has been held to not require such formalities in Florida in the case of Zuckerman v. Alter, 615 So.2d 661 (Fla. 1993). The North Carolina Uniform Trust Code clearly permits trusts to be created by deed (N.C.G.S. Section 36C-4-401) and as noted above and as provided in N.C.G.S. Section 36C-8-814, trustees may hold and exercise such powers.

Conclusions:

You should be able to reserve a power of appointment in the grantor as a valid exercise of a grantor's right to limit the conveyance in certain respects as it was recognized under the common law of England when our state was formed, does not seem to violate the rule against perpetuities or to be an unreasonable restraint on alienation. I would anticipate that these interests would be insurable if there are no problems as discussed further below. Stated differently, you probably can make an effective reservation, but whether you should reserve one should be considered carefully and the issues discussed with the client.

Ultimately, if the remaindermen are not the same people who would inherit absent the deed, you will have potential for a contest. Such a fact situation might make a compelling argument for a court to find that the reservation of the power merged with the life estate and vested title in the grantor in fee simple to pass under a will or by intestacy. "Bad facts make bad law". Exercise of the power to vest title in someone other than the grantor's intestate heirs or the devisees under a valid will, may also be a problem for the grantees in securing title insurance without a quit claim or estoppel agreement from the excluded heirs. If challenged these cases would most likely be alleging incompetence or undue influence.

There are several issues that should be considered in counseling clients on the advisability of including these provisions in conveyances. One such concern is that if a judgment lien is docketed against the life tenant, it would likely be considered as attaching to the remainder as well. If executed upon, the judgment creditor could arguably exercise the power.

Another such concern is the possibility of the docketing of a judgment against the holder of the remainder interest prior to the death of the life tenant. The issue raised is whether or not this judgment becomes a lien on the property preventing the exercise of the power of appointment by the life tenant. It would seem that if the life tenant exercises the power of appointment, it operates as if the exercise revokes the remainder interest, defeating the attachment of the lien. On the other hand, if the life tenant dies prior to the remainderman, the judgment would certainly attach to the property. Most title insurers are usually not inclined to insure over some of these issues in advance of a court decision, leaving many such issues concerning Ladybird deeds unresolved. Likewise, IRS tax liens against either party will likely be considered as attaching under the Federal decisions in Drye and Craft.

An additional concern involves the possible death of the remainderman before the life tenant. Since the life tenant may revoke the interest of the remainderman at any time, some argue that no interest is vested in the remainderman and therefore the interest does not go into the probate estate of the predeceasing remainderman. However, the better analysis seems to be that the remainder interest was vested subject to divestment and therefore the remainderman having died with a vested interest, requires probate of the remainderman's estate.

It has been suggested that any Ladybird/enhanced life estate deed also contain language absolving the life tenant from waste, i.e. "without liability for waste", permit mortgaging, leasing with or without consideration and also specifically grant authority to any attorney in fact to exercise the power in favor of any desired beneficiaries with or without consideration including gratuitous conveyances to the AIF where appropriate.