House Bill 545, Session Law 2008-194

This legislation contains many clarifying and amendatory provisions. Among the many miscellaneous provisions, were two notary validation amendments and several substantive changes pertaining to the Register of Deeds. The substantive changes consist of amendments further enabling or clarifying electronic document recording, changing the re-recording statute and codifying the definition of “indexing” for recording notice conforming to the decision in Pottle v. Link, COA07-359, filed on December 18, 2007.

Of particular concern to practitioners should be the revision to N.C.G.S. Section 47-36.1 which can be fairly said to eliminate its effectiveness as a corrective statute. Although the statute was originally clearly a corrective statute, the language enabling its corrective affect has been deleted suggesting that the resulting legal affect is that it is no longer a corrective statute, but rather a notice statute despite some allusions to “corrective affidavits”. The provision was originally adopted to permit the attorney drafting an instrument to make minor corrections without requiring re-execution and acknowledgment. It has been observed that many of the attempts to "correct" defective instruments under the statute as it existed were not effective as they often exceeded the limited scope of the statute. Even if some were effective, they would be effective only from the date the "corrected" document was recorded and as there was no relation back provision any intervening matters of record would defeat the corrective effect.

Some real estate practitioners assumed that if a deed of trust referenced an attached description exhibit and it turned out not to be attached upon recording, that it would be an acceptable practice to re-record the instrument with the description attached pursuant to N.C.G.S. Section 47-365.1. The statute does not give guidance as to what constitutes an “obvious” error, however Green v. Crane, 96 N.C.App. 464 (1990) has shown us that an omitted description should not be considered as being within the purview of the statute. In Re: Hudson, NO. COA06-345, filed on April 3, 2007 may very well prove to be a ‘must read’ decision for real property practitioners. The North Carolina Court of Appeals affirmed the decision of the Superior Court invalidating a deed of trust due to description issues in a de novo hearing on the appeal of the ruling of the Clerk of Superior Court in a foreclosure proceeding. The court ruled that the Statute of Frauds requires that the description must be attached to the deed of trust at the time of it its execution for the instrument to be valid. This ruling lends ammunition to the implications of Green as being a prohibition of the practice of subsequent rerecording with a new attachment if the attachment is necessary to the validity of the conveyance.

The existing statute has been construed strictly by the courts, thus we infer that an error must be obvious on its face or, at the very least, should not change the obligations of the grantor before the statute could be used. Where the instrument contains information on its face that is sufficient to describe the property, the attachment is arguably surplusage and re-recording with the attachment would be harmless clarification. The old statute provided:

"§ 47‑36.1.  Correction of errors in recorded instruments.

Notwithstanding G.S. 47‑14 and 47‑17, an obvious typographical or other minor error in a deed or other instrument recorded with the register of deeds may be corrected (emphasis added) by rerecording the original instrument with the correction clearly set out on the face of the instrument and with a statement of explanation attached. The parties who signed the original instrument or the attorney who drafted the original instrument shall initial the correction and sign the statement of explanation. If the statement of explanation is not signed by the parties who signed the original instrument, it shall state that the person signing the statement is the attorney who drafted the original instrument. The statement of explanation need not be acknowledged. Notice of the correction made (emphasis added) pursuant to this section shall be effective from the time the instrument is rerecorded."

The new statute, effective October 1, 2008, provides:

  
SECTION 7.(c)  G.S. 47‑36.1 reads as rewritten:

"§ 47‑36.1.  Correction of errors in recorded instruments.

Notwithstanding G.S. 47‑14 and G.S. 47‑17, notice of typographical or other minor error in a deed or other instrument recorded with the register of deeds may be given by recording an affidavit. If an affidavit is conspicuously identified as a corrective or scrivener's affidavit in its title, the register of deeds shall index the name of the affiant, the names of the original parties in the instrument, the recording information of the instrument being corrected, and the original parties as they are named in the affidavit. A copy of the previously recorded instrument to which the affidavit applies may be attached to the affidavit and need not be a certified copy. Notice of the corrective information as provided by the affiant is deemed to have been given as of the time the corrective affidavit is registered. Nothing in this section invalidates or otherwise alters the legal effect of any instrument of correction authorized by statute in effect on the date the instrument was registered. "

It seems obvious that the Legislature’s elimination of the language giving corrective effect and substitution of language only providing for notice will be deemed significant when interpreted by courts inclined to strict interpretation is in Greene and In re: Hudson. The statute will be useful to provide clarification concerning errors that are not substantive. An example would be a deed of trust calling for an attached description but including a property address in the description section that is sufficient to pass title. Even though sufficient a corrective affidavit would eliminate question as to the appropriate metes and bounds description. Another example would be the instance where a typographical error in the map reference does not create any ambiguity in the description but the drafter wishes to give notice of the correct reference.

The Statute provides that “Nothing in this section invalidates or otherwise alters the legal effect of any instrument of correction authorized by statute in effect on the date the instrument was registered.” Thus, it is clear that the amendment does not foreclose the common law methods of correcting such errors such as filing a correction deed, making corrective changes evidenced by re-execution and acknowledgement on original instrument and re-recording, or by a reformation action because the word "statute" is used rather the word "law". These methods have always been the preferred method of correction as there is no question as to their effectiveness if done carefully.

The practice of re-recording conveyances pursuant to N.C.G.S. Section 47-36.1 as a result of description errors should always have been considered judiciously.  The new provisions make it prudent where title insurance is to be secured that a consultation with underwriting counsel should be considered essential to discuss the effect, if any, of a corrective affidavit upon the title to the proposed insured land 

The opinion in Livesay v. Carolina First Bank, COA07-1578, filed on August 19, 2008 in the North Carolina Court of Appeals affirms that when a settlor dies after conveying assets to a trust that was revocable at the settlor's death, those assets are subject to the claims of creditors and available to the Personal Representative for the satisfaction of the claims of “the settlor's creditors, costs of administration of the settlor's estate, the expenses of the settlor's funeral and disposal of remains, and statutory allowances to a surviving spouse and children to the extent that the settlor's probate estate is inadequate to satisfy those claims, costs, expenses, and allowances, unless barred by applicable law.”

In this declaratory action, the plaintiff, individually and as the successor trustee of the trust and in her capacity as the guardian ad litem for the minor beneficiaries, appealed the trial court's grant of partial summary judgment in favor of the defendants which included the Administrator CTA of the estate of the decedent settlor. In 1998, the plaintiff and the decedent created the trust for the benefit of the settlors and their children with the decedent as the initial trustee. The settlors enjoyed the usual benefits of such trusts during their joint lives pursuant to the trust instrument. Any contributions to the trust corpus were to retain their original character in the event of a revocation. Upon the death of either settlor, the trust was to inure to the benefit of the surviving settlor and to the settlors' children for their “health, education, and welfare.” Upon the death of the surviving settlor, the trust was to continue for the benefit of the settlors' children, with no principal distributions allowed until they attained twenty-five years of age.

The plaintiff filed a declaratory judgment action seeking a declaration that the trust assets were not subject to the debts of decedent's estate. Ultimately, an order for partial summary judgment was granted for the defendants and the plaintiff appealed. There are several contentions by the plaintiff that the Court did not find persuasive. In the interest of space limitations, we will only address a few of the most pertinent.

N.C.G.S. Section 36C-5-505(a)(3) of the North Carolina Uniform Trust Code was enacted in 2005, became effective on 1 January 2006, and applies to all trusts created before or after that date subject to exceptions in the section and makes the assets of a revocable trust subject to the claims of the estates creditors and administration if the estate has insufficient assets. The plaintiff contended that the section did not apply, but rather that Section 36A-115 of the Uniform Trust Act (which was repealed by the adoption of the NCUTC) applied. That Section of the former statute provided that “all estates or interests of trust beneficiaries are alienable either voluntarily or involuntarily to the same extent as are legal estates or interests of a similar nature[,]” except for (1) discretionary trusts, (2) support trusts, or (3) protective trusts. The plaintiff contended the limiting provisions of the trust agreement made the assets subject to those exclusions. Also, as the trust became irrevocable upon decedent's death the plaintiff argued that the exceptions made the trust inalienable after death. The Court pointed out that “this argument ignores the fact that up until the moment of his death, decedent possessed the power to enjoy (1) the right to distributions of income, (2) the right to distributions of principal, (3) the right to revoke the trust in whole or in part, and (4) the right to alter or amend the trust.”

The Court analogized this latter argument with the rule under the Internal Revenue Code that provides that the value of the gross estate includes the value of all property over which the settlor retains such power. The Court determined also that the trust in question did not meet the test of Chapter 36Afor exclusion and that Section 36A-115 could not apply. Further the Court determined that the exceptions in the applicability provisions of the NCUTC did not pertain and furthermore, since the “2007 official comment to section 36C-5-505 clarifies that “[s]ubsection (a) is generally consistent with North Carolina case law with respect to the ability of a creditor to reach the property in a trust for the benefit of the settlor.” N.C. Gen. Stat. § 36C- 5-505 am. cmt. (2007) (citing Pilkington v. West, 246 N.C. 575, 580, 99 S.E.2d 798, 802 (1957)). As the statute is consistent with case law, we cannot say the trial court erred in finding it applicable to plaintiff's case.”
 
An unanswered question resulting from the limited facts and discussion in this opinion is what would have been the outcome of an attempt to recover trust property obtained as the result of a conveyance to the trustees of property held by the settlors as tenants by the entireties. It is an exceedingly common occurrence in North Carolina and elsewhere for couples to employ inter vivos revocable trusts as an estate planning tool. The Court in this opinion noted that the official comments to Section 36C-5-505 recognize that a revocable trust is usually employed as a will substitute. Thus, in the vast majority of instances of the use of revocable trust agreements, there is no effort to defraud creditors, but rather, plain-old-fashioned financial planning.

As practical matter, when the Personal Representative takes control of any trust corpus for the satisfaction of the decedent settlor’s debts, the action can be said to effect a revocation of the trust or a voiding of the transfer to the trustee. The opinion rules that the property subject to the trust agreement was available to the decedent until the moment of his death and is thus available to his creditors for satisfaction of such debts. It is as if the court is voiding the transfer and putting the property back in his hands a moment before death.

In this opinion the Court of Appeals also noted that the original trust agreement provided that “contributions to the trust assets were to retain their original character such that in the event of revocation, no rights existing prior to contribution would be diminished.” It can be argued that under the express terms of this agreement the property should retain its character as entireties property and pass to the spouse free of the claims of creditors unless it can be shown that the transfer was done solely for the purpose of defrauding creditors. Any other result would likely have catastrophic, unintended, and inequitable consequences where a couple conveys entireties property in trust pursuant to an ordinary estate planning trust agreement long before circumstances such as those in this case might arise.

Where does this leave the practitioner? One has to be alert when dealing with a transfer out of a revocable trust as to whether the trust settlor has an open estate administration or has died within the preceding two years. In the instance of an open estate, a review of the estate file will be required and the proposed transfer treated as one by the heirs which at a minimum will require publication to have begun and joinder of the Personal Representative. In the instance of an unadministered estate within two years of death, consideration will have to be made as to the need for an administration to cut off potential claims of creditors. In either case, if title insurance is involved, consultation with underwriting counsel is a must. If the estate is properly administered and closed, or if the settlor died more than two years prior to the proposed conveyance, there should be no remaining remedy for any supposed creditors.

             Most people don’t realize there are varying ALTA title policies with disparate coverage provisions which may handle a claims scenario differently.  Episode 12 of Dirt Tales dealt with a fact situation in which the owner transferred property into a living trust and how the 1992 and 2006 policies handled the matter differently.  In this fact situation the 2006 policy would continue to cover the newly vested entity, the trust, while the 1992 policy would not. 

            But suppose instead of a transfer into a trust, what if there had been a merger or acquisition by Corporation A of Corporation B, our insured.  Now that the insured property is now owned by Corporation A does the title policy in Corporation B’s name continue to insure the land now owned by Corporation A?  Again, there is a difference in whether the title policy is a 1992 policy form or the 2006 form.  With respect to this the 1992 ALTA policy, states:

1.          Title to the estate or interest described in Schedule A being vested other than as stated therein;

              In other words, unless the named insured in the policy is the same as the insured owner of the property at the time of the claim there will be no coverage under the policy.  However, the 2006 title policy contains provisions for continued coverage under certain circumstances where title to the property has been transferred. 

 Section 1. Definition of Terms:       

 The following terms when used in this policy mean:         

Conditions and Stipulations

3 (e)  “Insured":  The Insured named in Schedule A. 

 (i)  The term "Insured" also includes

(C)  successors to an Insured by dissolution, merger, consolidation, distribution, or reorganization; 

(D) successors to an Insured by its conversion to another kind of Entity; 

(E) a grantee of an Insured under a deed delivered without payment of actual valuable consideration conveying the Title

(1) if the stock, shares, memberships, or other equity interests of the grantee are wholly-owned by the named Insured, 

(2) if the grantee wholly owns the named Insured, or 

(3) if the grantee is wholly-owned by an affiliated Entity of the named Insured, provided the affiliated Entity and the named Insured are both wholly-owned by the same person or Entity;  

              In addition to covering the named insured, the 2006 policy will continue to provide coverage where title has been transferred into a trust or acquired by reason of a corporate merger or acquisition or by inheritance.  The 2006 policy gives the insured and their successors much broader coverage than afforded by the 1992 policy, but the Expanded Coverage Policy, also known as the ALTA Homeowner’s Policy, gives even broader coverage and will continue coverage even where title is transferred as a part of a divorce settlement.   

Section 2.        CONTINUATION OF COVERAGE, states:

a.         This Policy insures You forever, even after You no longer have Your Title.  You cannot assign this Policy to anyone else.

b.         This Policy also insures:

(2)       Your spouse who receives Your Title because of dissolution of Your marriage.

            Under the Homeowner’s Policy, Covered Risks No. 28, protection is also provided in the event a neighbor builds a structure on the insured’s property after the effective date of the policy.  This is unique in giving post policy coverage in a title insurance policy.   

                         Item 9 under Conditions sets out inflation protection, which automatically will occur on an annual basis adjusting the amount of coverage up to a maximum amount of 150% of the original insured amount.  

            The Expanded Coverage Homeowner’s Title Policy is available for both the lender and owner in North Carolina for an additional 20% of the filed premium rate.