When a title examination reveals a deed in the chain of title from a trustee in foreclosure questions frequently arise as to the insurability of the title. North Carolina specifies who must receive notice and this article will address concerns as to the adequacy of the statutory requirements and our views on the insurability of the title in cases where there are subordinate liens of record.

1. Liens other than federal tax liens.

G.S. 45-21.16 pertains to notice and hearing in a power of sale foreclosure of a mortgage or deed of trust.

Pursuant to G.S. 45-21.16(a), a notice of hearing must be filed by the mortgagee in a mortgage or by the trustee in a deed of trust. The notice of hearing must be served upon the person obligated to repay the indebtedness, any person to whom the mortgage or deed of trust directs notice to be sent in the event of default and every "record owner." G.S. 45-21(b). Specifically, G.S. 45-21.16(b) states that "record owner" does not include the holder of a mortgage, deed of trust, judgment, mechanics’ or materialmen’s lien, other liens, or tenants in possession under unrecorded leases. The notice of hearing can constitute a notice of sale. G.S. 45-21.16(c)(10).

G.S. 45-21.16(d) outlines the clerk’s hearing procedure. The clerk will either find or not find the existence of (1) a valid debt; (2) a default; (3) a right to foreclose the instrument and (4) notice to those entitled under G.S. 45-21.16(b). If there is a favorable finding for foreclosure, the clerk will authorize notice of sale, which sale may be conducted once an authorization or order is entered. The statute states that the clerk’s action is an appealable judicial act. G.S. 45-21.16(d1). This seems to qualify as "state action," mentioned below.

G.S. 45-21.16A sets forth the contents of the notice of sale. G.S. 45-21.17 sets forth the posting and publication requirements pertaining to this notice. G.S. 45.21.17(4) requires that the notice of sale be mailed by first-class mail at least 20 days prior to the date of the sale to each party entitled to notice of hearing by G.S. 45.21.16. As noted above, that does not include subordinate lienors. But the notice of sale must also be mailed to parties filing a request for notice under G.S. 45-21.17A. G.S. 45-21.17(4). If the notice of hearing also contains all of the notice of sale information, the notice of hearing can constitute a notice of sale. G.S. 45-21.17(4). G.S. 45-21.17A(f) sets forth a limitation on the time for bringing an action to set aside a foreclosure sale for failing to comply with G.S. 45-21.17A.

The case of Mennonite Board of Missions v. Adams, 462 U.S. 791, 103 S. Ct. 2706, 77 L.Ed.2d 180 (1983), discussed in E. Urban and G. Whitney, North Carolina Real Estate § 14-14 (Harrison Co. 1996), should be noted. In that case, a tax foreclosure sale was conducted. The statute provided for posting and publication and notice by certified mail to the owner. No statutory provision was made for personal or mailed notice to subordinate lienors. In this case, the mortgagee learned of the sale two years later after the redemption period expired. The Supreme Court held that the notice by posting and publication did not meet the standards of the due process clause of the 14th Amendment to the U.S. Constitution. The court stated that the state statute must provide notice reasonably calculated, under all circumstances, to apprise interested parties of the pending of the action and afford them an opportunity to present their objections. A mortgagee has a legally protected property interest and is entitled to notice reasonably calculated to apprise him of the pending of the sale. Personal service by mail or notice is required even though sophisticated creditors have means to discover tax delinquency and sale pendency.

It would seem that there is, arguably, sufficient "state action" to make Mennonite applicable to a power of sale foreclosure and to require proper notice even if the subordinate lienor did not file a request for notice under G.S. 45-21.17A. E. Urban and G. Whitney, supra. Also, it would seem that notice of sale under G.S. 45-21.16A and G.S. 45-21.17 is what Mennonite requires. Notice of hearing to a subordinate lien holder under G.S. 45-21.16 should not be required given its purpose set forth in G.S. 45-21.16(d) (unless the notice of hearing serves as the notice of sale). But it cannot hurt to give a subordinate lienor notice of hearing to overcome the opposing argument that the lienor might have, for example, information regarding the validity of the debt that the owner does not have or does not present.

Some cases from other jurisdictions indicate that if the subordinate lienholder has the statutory opportunity to request notice but does not, this failure does not waive Mennonite notice requirements. Davis Oil Co. v. Mills, 873 F.2d 774 (5th Cir. 1989); 48 Louisiana L. Rev. 536, 585 - 586 (1988).

In cases where the Mennonite notice is not given, a title insurer can consider giving coverage over the problem if there is no equity above the amount owed under the foreclosed instrument, or other helpful circumstances exist, such as lapse of a substantial period of time or the subordinate lien holder being defunct, deceased or impossible to find.

Incidentally, a subordinate unfiled claim of lien under Chapter 44A might be protected by Mennonite when the foreclosing lender has actual knowledge of the unfiled lien and claimant.

2. Federal tax liens.

Subordinate federal tax liens present a special federal statutory problem in addition to Mennonite issues. 26 U.S.C. § 7425(b) must be consulted. As pointed out in E. Urban and G. Whitney, North Carolina Real Estate § § 21-47 and 14-14(c) (1996), if the federal tax lien is filed more than 30 days prior to the date of the foreclosure sale, and the United States is not given notice of sale in writing, by registered or certified mail or by personal service, not less than 25 days prior to the date of sale, the foreclosure will be subject to the otherwise inferior federal tax lien. 26 U.S.C. § 7425(b). The required form notice is set forth in Treas. Reg. § 301. 7425-3(d)(1) and is reproduced in E. Urban and G. Whitney, supra, at § 21-47. As those authors point out, a filed subordinate federal tax lien will be cut off by the foreclosure (1) if the notice required above is given or (2) if the federal tax lien is not properly filed more than 30 days prior to the date of sale. The district director of the IRS can consent to the sale free and clear of its tax lien in cases where the rule above would require notice. E. Urban and G. Whitney, supra, at § 21-47(c); 26 U.S.C. § 7425 (c)(2).

The United States has a right to redeem within 120 days from the date of the foreclosure sale in cases where the federal tax lien is cut off by the foreclosure or where the United States consents to a sale free and clear of the tax lien as noted above. E. Urban and G. Whitney, supra, at § 21-47(d), discussing 26 U.S.C. § 7425(d) and pertinent IRS regulations.

It seems arguable that Mennonite would require notice of sale even when notice is not required for a subordinate federal tax lien as noted above other than when the United States consents, but this is uncertain given the express provisions of 26 U.S.C. § 7425(b)(2)(A) dispensing with notice when the federal tax lien is not filed more than 30 days prior to the date of sale, since 7425(b)(2)(A) could be construed as an express waiver of notice of sale.

3. Conclusion.

The title examiner and the foreclosing attorney should be sensitive to the uncertainties and potential pitfalls inherent in foreclosing a deed of trust against subordinate liens. Caution and conservative practice are recommended and the assistance of your title insurer regarding issues of insurability when notice is not given is important.

Since the 1975 amendment to G.S. 47-18, an option to purchase must be recorded to impart constructive notice to purchasers for value and lien creditors - just like a deed, contract to sell or deed of trust. Sometimes a title examiner will encounter a previously recorded option to purchase. The cases of Trogden v. Williams, 144 N.C. 192, 56 S.E. 865 (1907) and Lawing v. Jaynes, 285 N.C. 418, 206 S.E. 2d 865 (1907), should be noted although they pre-date the amendment.

In Trogden, an option dated 1-16-1905 with a 90 day option period was recorded 5-4-1905. It stated that if the holder decided to buy within the 90-day period, payment had to be completed within one year of the first payment due on the date of decision. On 6-28-1905, another party was given a contract to purchase by the owner. The court held that he took free of the option since there was no deed of record to the holder of the option. Held that where purchasers were persons who had knowledge of all circumstances surrounding their transactions with optionors, purchasers should be required to establish that they were purchasers for a valuable consideration and that they had no actual notice of the pendency of suit by optionees against optionors for specific performance when purchasers acquired deed from optionors.

The Lawing court held that where purchasers were persons who had knowledge of all of the circumstances surrounding their transactions with optionors, they should be required to establish that they were purchasers for a valuable consideration and that they had no actual notice of the pendency of the suit by optionees against optionors for specific performance at the time purchasers acquired deed from optionors. The court went on to note that, "under the registration statutes of Maryland and of Georgia, it has been held that the rights of an optionee under a properly recorded option agreement who exercises his [285 N.C. 425] option within the prescribed time are superior to those of a third party to whom the optionor has conveyed the same property Before the time for exercising the option has expired. Daniel v. Kensington Homes, Inc., > 232 Md. 1, 192 A.2d 114 (1963); Banks v. Harden, > 221 Ga. 505, 145 S.E.2d 563 (1965)."

In Several commentators question whether Lawing and "inquiry" rules of other jurisdictions, at least arguably, mean that prudent practice requires off-record inquiry as to exercise of the option. The recording gives record notice of the valid option when recorded; it does not mean that you can assume that there is no off-record notice of exercise within the option period, with a deed of record to follow after.

The best prepared options will provide that purchases for value and lien creditors can rely upon there being no record evidence of exercise within the stipulated option period. In any event, resolve these matters with the assistance of your title insurer. These aspects are discussed in more detail in E. Urban and G. Whitney, North Carolina Real Estate § 21-101 (1996).

G.S. 45-21.23 states that a foreclosure sale shall be held between 10:00 AM and 04:00 PM on any day other than Sunday or a "legal holiday." The following is a list of holidays from G.S. 103-4(a):

(1) New Year's Day, January 1.

(1a) Martin Luther King, JR’s, Birthday, the third Monday in January.

(2) Robert E. Lee's Birthday, January 19.

(3) Washington's Birthday, the third Monday in February.

(3a) Greek Independence Day, March 25.

(4) Anniversary of signing of Halifax Resolves, April 12.

(5) Confederate Memorial Day, May 10.

(6) Anniversary of Mecklenburg Declaration of Independence, May 20.

(7) Memorial Day, the last Monday in May.

(8) Good Friday.

(9) Independence Day, July 4.

(10) Labor Day, the first Monday in September.

(11) Columbus Day, the second Monday in October.

(11a) Yom Kippur.

(12) Veterans Day, November 11.

(13) Tuesday after the first Monday in November in years in which a general election is to be held.

(14) Thanksgiving Day, the fourth Thursday in November.

(15) Christmas Day, December 25.

G.S. 103-4(b) states that whenever a public holiday shall fall upon a Sunday, the following Monday shall be a public holiday.

Robert E. Lee's Birthday, January 19, Greek Independence Day, March 25, Anniversary of signing of Halifax Resolves, Confederate Memorial Day, May 10, Anniversary of Mecklenburg Declaration of Independence, May 20, Columbus Day, the second Monday in October and Yom Kippur are holidays that are not widely recognized as days on which a foreclosure sale may not be conducted. In fact many of the legal holidays are not observed with courthouse closing and therefore some title examiners and foreclosure attorneys are not always alert to the possible title defect caused by failure to observe the requirements of the statutes.

Depending upon various factors involved, including the passage of time or lack of any equity in the property, a title insurer may be willing to insure over a sale date taking place on one of these dates and should be consulted for assistance.

In Swaim V. Simpson, 120 N.C.App. 863, 463 S.E. 2d 785 (1995), Aff’d w.o. opin., 343 N.C. 298, 469 S.E. 2d 553 (1996), the plaintiffs were granted an easement for ingress and egress. The court rejected the plaintiffs’ claim that this grant included the right to locate, install and maintain utilities. Finding that this would be increasing the burden on the servient tract where the parties did not expressly grant the extra rights in the easement.

Judge Johnson’s dissenting opinion is more interesting in that it presents additional facts not addressed in the majority opinion. The dissent takes a common sense approach stating "that a deed, which included an easement restricting a lot to residential use sufficient to maintain a residence, would necessarily provide the right to install utilities to the residential lot. In Sparrow v. Dixie Leaf Tobacco Co., 232 N.C. 589, 61 S.E.2d 700 (1950), the Court held that, when determining what uses of an easement are reasonably necessary, consideration must be given to the purposes or uses for which the easement was granted. It would be reasonably necessary that an easement for residential use include, not only the right to ingress and egress, but also the right to lay utility lines. Any other conclusion would render the lot restricted for residential use basically inhabitable."

It has been common practice in many areas to convey access easements without reference to utilities. Unless an applicable limitations period has elapsed, the effect of Swaim may be to allow sellers to demand additional money from property purchasers, after the closing, in situations similar to the one the dissent describes in order to assure an uninterrupted access to utility service.