Attorneys drafting restrictive covenants for developers in eastern North Carolina should be aware that the North Carolina Department of Environment, Health and Natural Resources (DEHNR) adopted changes to stormwater management regulations (15A NCAC 2H .1001 et seq.) affecting 20 coastal counties effective September 1, 1995. These changes apparently have not received widespread circulation and are not well known by a significant number of real estate attorneys.

15A NCAC 2H .1002(4) is the section that defines the following "Coastal Counties" : Beaufort, Bertie, Brunswick, Camden, Cartaret, Chowan, Craven, Currituck, Dare, Gates, Hertford, Hyde, New Hanover, Onslow, Pamlico, Pasquotank, Pender, Perquimans, Tyrrell, and Washington.

15A NCAC 2H .1003(b)(1) makes these regulations applicable to development activities in the 20 coastal counties and 15A NCAC 2H .1003(d) (1) and (2) provide that projects subject to the permitting requirements of the regulations must have recorded deed restrictions and protective covenants to ensure that the development activities maintain the development consistent with the approved plans. The permit application promulgated by the Division of Environmental Management includes information informing the applicant of these requirements and, by attachment , provides an example of the required language as follows:

"No more than ________ square feet of any lot, including that portion of the right-of-way between the edge of pavement and the front lot line, shall be covered by impervious structures, including asphalt, gravel, concrete, brick, stone, slate or similar material, not including wood decking or the water surface of swimming pools. This covenant is intended to ensure continued compliance with the stormwater permit issued by the State of North Carolina. The covenant may not be changed or deleted without the consent of the State.

No one may fill in or pipe any roadside or lot line swale, except as necessary to provide a minimum driveway crossing.

For curb and gutter projects, no one may pipe, fill in, or alter any lot line swale used to meet North Carolina Stormwater Management Permit requirements."

Failure to comply with these regulations may subject the owner/developer to revocation or modification of the permit (15A NCAC 2H .1011) or the enforcement provisions of Article 21 of Chapter 143 of the North Carolina General Statutes (15A NCAC 2H .1003(h)(4)). This Article includes in part the following provisions.

§ 143-215.6B. Enforcement procedures; criminal penalties

(f) Any person who negligently violates any: (i) classification, standard, or limitation established in rules adopted by the Commission pursuant to G.S. 143-214.1, 143-214.2, or 143-215; (ii) term, condition, or requirement of a permit issued pursuant to this Part, including permits issued pursuant to G.S. 143-215.1, pretreatment permits issued by local governments, and laboratory certifications; (iii) term, condition, or requirement of a special order or other appropriate document issued pursuant to G.S. 143-215.2; or (iv) rule of the Commission implementing this Part; and any person who negligently fails to apply for or to secure a permit required by G.S. 143-215.1 shall be guilty of a Class 2 misdemeanor which may include a fine not to exceed fifteen thousand dollars ($15,000) per day of violation, provided that such fine shall not exceed a cumulative total of two hundred thousand dollars ($200,000) for each period of 30 days during which a violation continues.

(g) Any person who knowingly and willfully violates any (i) classification, standard, or limitation established in rules adopted by the Commission pursuant to G.S. 143-214.1, 143-214.2, or 143-215; (ii) term, condition, or requirement of a permit issued pursuant to this Part, including permits issued pursuant to G.S. 143-215.1, pretreatment permits issued by local governments, and laboratory certifications; or (iii) term, condition, or requirement of a special order or other appropriate document issued pursuant to G.S. 143-215.2; and any person who knowingly and willfully fails to apply for or to secure a permit required by G.S. 143-215.1 shall be guilty of a Class I felony, which may include a fine not to exceed one hundred thousand dollars ($100,000) per day of violation, provided that this fine shall not exceed a cumulative total of five hundred thousand dollars ($500,000) for each period of 30 days during which a violation continues. For the purposes of this subsection, the phrase "knowingly and willfully" shall mean intentionally and consciously as the courts of this State, according to the principles of common law interpret the phrase in the light of reason and experience.

§ 143-215.6A. Enforcement procedures: civil penalties

(a) A civil penalty of not more than ten thousand dollars ($10,000) may be assessed by the Secretary against any person who:

(1) Violates any classification, standard, limitation, or management practice established pursuant to G.S. 143-214.1, 143-214.2, or 143-215.

(2) Is required but fails to apply for or to secure a permit required by G.S. 143-215.1, or who violates or fails to act in accordance with the terms, conditions, or requirements of such permit or any other permit or certification issued pursuant to authority conferred by this Part, including pretreatment permits issued by local governments and laboratory certifications.

 

§ 143-215.6C. Enforcement procedures: injunctive relief

Whenever the Department has reasonable cause to believe that any person has violated or is threatening to violate any of the provisions of this Part, any of the terms of any permit issued pursuant to this Part, or a rule implementing this Part, the Department may, either before or after the institution of any other action or proceeding authorized by this Part, request the Attorney General to institute a civil action in the name of the State upon the relation of the Department for injunctive relief to restrain the violation or threatened violation and for such other and further relief in the premises as the court shall deem proper. The Attorney General may institute such action in the superior court of the county in which the violation occurred or may occur or, in his discretion, in the superior court of the county in which the person responsible for the violation or threatened violation resides or has his or its principal place of business. Upon a determination by the court that the alleged violation of the provisions of this Part or the regulations of the Commission has occurred or is threatened, the court shall grant the relief necessary to prevent or abate the violation or threatened violation. Neither the institution of the action nor any of the proceedings thereon shall relieve any party to such proceedings from any penalty prescribed for violation of this Part.

note - The N.C. Administrative Code section of West’s N.C. CD-ROM library is current only through April of 1995 and does not include these amendments.

 

William T. Biggers of Asheville was kind enough to suggest that our forms for bringing an action under G.S. 45-37 should include a provision in the complaint and judgment requiring cancellation of the satisfied instrument or for judicial cancellation. This is an excellent suggestion and we highly commend it to you. He has provided the following suggested language from one of his complaint forms:

That the Trustee be directed and authorized by the Court to cancel the Deed of Trust, or, alternatively, that the Court enter a Judgment to be recorded in the Office of the Register of Deeds for County, N.C. cancelling the Deed of Trust of Public Record.

If the trustee is unavailable it may be advisable to substitute the beneficiary or just ask for judicial cancellation. Other comments that we have received about the article suggest that mailing a copy of the article along with the demand required by the Statute is proving to be effective in getting a satisfactory response.

G.S. 45-38 requires the recording of a "notice of foreclosure." The trustee in a deed of trust or the trustee’s attorney must do so. The notice can consist of a separate instrument, or that part of the original deed of trust re-recorded, showing the information required by the statute. What happens if the notice is not recorded? It is helpful to analyze the problem chronologically.

First, the deed of trust must be properly recorded, which includes proper indexing. G.S. 47-20. A deed of trust is indexed in the names of the grantor and trustee only; it need not be indexed in the name of the lender-beneficiary. G.S. 161-22(d). This is an exception to the general rule that indexing under the names of all parties is required under G.S. 161-22(a).

Second, foreclosure under power of sale results in a deed to the foreclosure purchaser from the trustee. This deed will be indexed under the name of the trustee (or substitute trustee) in the grantor index and under the name of the grantee in the grantee index. G.S. 161-22.1. So, up to this point, the chain of title would be complete and properly indexed of record. The notice of foreclosure must be indexed in the names of the parties to the original deed of trust. G.S. 161-14.1. One authority states that this means that the notice is indexed in the grantor’s index under the name of the grantor of the deed of trust and in the grantee’s index in the name of the trustee. W. Campbell, North Carolina Guidebook For Register of Deeds, p. 82 (Instit. of Gov’t., Seventh Ed. 1994). (This excellent book can be ordered by calling (919) 966-5381. Fax number (919) 962-0654.)

So, for priority purposes, if the deed of trust and trustee’s deed are properly indexed, it would seem that failure to record and index a notice of foreclosure should not cause a priority problem. However, that leaves the question: what is the effect of failure to record such a notice? While the answer is uncertain, it seems doubtful that the foreclosure sale would be invalidated. If there was a time gap between the foreclosure and the recording of the trustee’s deed one could argue that a title examiner would be entitled to rely on any apparent extinguishment of a deed of trust under any applicable statute of limitations absent a recorded notice of foreclosure and trustee’s deed. Other harmful results under priority rules are difficult to imagine, however. Perhaps G.S. 45-38 should be clarified. In any event, G.S. 45-38 should be complied with, due to the uncertainty. We have given coverage over failure to comply with G.S. 45-38 in certain cases.

In our January, 1997 edition, we discussed the Court of Appeals decision in Smith v. Martin. That opinion referred to a related United States Court of Appeals case, Smith v. The United Carolina Bank, (CA-93-300, BK-91-14367-C-130 1995), an unpublished opinion which is not binding in the fourth circuit.

The following principles set out in the federal court case are quoted below for your information:

"A 1956 decision of the North Carolina Supreme Court, Monteith v. Welch, 244 N.C. 415, 94 S.E. 2d 345, indicates that the Bank, whose position is analogous to that of a subsequent innocent purchaser, is entitled to priority in this case. In Monteith, Mr. and Mrs. Monteith were the beneficiaries of a properly recorded deed of trust. Thomas Franks was named trustee. Id. at 416, 94 S.E. 2d at 346. After several years, the underlying property was sold to Mr. and Mrs. Welch. Id. At the time of the sale, the Monteiths’ deed of trust had not been cancelled. The Welches were aware of the outstanding lien; ;at closing, they gave Franks money with the understanding that he would pay the Monteiths and cancel their deed of trust. Id. at 419-20, 94 S.E. 2d at 349-50. Franks failed to carry out this plan. He cancelled the Monteiths’ deed of trust, but apparently pocketed the money. The Monteiths then sued to re-establish their security interest."

"The North Carolina Supreme Court affirmed a jury verdict in favor of the Monteiths. The court rejected the Welches’ argument that they were entitled to rely on Frank’s cancellation of the lien. Id. at 420-21, 94 S.E. 2d at 349-50. Crucial to the court’s decision was the fact that the cancellation had not yet occurred at the time the Welches bought the property. Indeed, Franks did not cancel the deed of trust until eight days after the property was conveyed to the Welches. Id. at 419, 94 S.E. 2d at 349. The court reasoned that the Welches thus had notice of the Monteiths’ senior lien and did not qualify as subsequent innocent purchasers. Id. at 420-21, 94 S.E. 2d at 349-50."

"In the course of its discussion, the court noted that the Welches could have relied on Frank’s cancellation if the cancellation occurred ‘before they purchased [the property] and [if] in fact [they] purchased [the property] relying on [the cancellation’s] validity. The burden of establishing that they purchased without notice of the unauthorized cancellation was on [the Welches].’ Id. at 420, 94 S.E. 2d at 349. From this passage, we discern the following rule of North Carolina law: a subsequent lien creditor with a properly recorded deed of trust enjoys priority, despite the unauthorized cancellation of a prior deed of trust, if the subsequent creditor obtains its deed of trust after the cancellation has occurred, in reliance on the cancellation’s validity, and without knowledge that the cancellation was unauthorized."

"Other North Carolina authority is arguably inconsistent with this rule. See Union Cent. Life Ins. Co. v. Cates, 193 N.C. 456, 137 S.E. 324 (1927) (party aggrieved by unauthorized cancellation is entitled to priority unless it was negligent); First Fin. Sav. Bank v. Sledge, 415 S.E. 2d 206 (N.C. App. 1992) (same); see also Annotation, 35 A.L.R. 2d 948 (1954). Despite these authorities, we believe Monteith, as the state supreme court’s most recent pronouncement on the issue presented here, is controlling."

This would seem to be the law today, including when cancellation of a deed of trust is accomplished under the method in G.S. 45-37(a)(6) utilizing a certificate of satisfaction and, on occassion, an affidavit of lost note. Please see our prior newsletters and seminar materials for a discussion of G.S. 45-37(a)(6).