The defendants in this matter appealed the trial court's order granting the plaintiff's motion for summary judgment and denying the defendants' motion for judgment on the pleadings ruling that pursuant to N.C.G.S. § 47-20, a senior deed of trust loses its priority over a junior deed of trust when the senior deed of trust was modified to extend the maturity date and the loan modification agreement (LMA) was filed after the junior deed of trust was recorded. In its well-reasoned opinion the Court of Appeals determined that the senior deed of trust does not lose priority.

In 1999, the debtor granted and recorded a first deed of trust on the subject property (the "Senior deed of trust") to secure a $52,850.00 loan. On the same day, the debtor also granted and subsequently recorded a second deed of trust securing a second loan in the amount of $22,650.00 (the "Junior deed of trust"). Both deeds of trust matured on the same day in 2014. Subsequently in that year, the note holder of the Senior deed of trust and the debtor executed and recorded an LMA extending the maturity date of the loan to 2033 and restating the unpaid principal balance of $46,620.96. The loan modification agreement provided that all the provisions contained in the Note and Senior Deed of Trust were to "remain in full force and effect, except as . . . modified."

The Junior deed of trust was foreclosed and the plaintiff purchased the property in 2021. After the debtor defaulted on the modified loan, the holder of the Senior deed of trust foreclosed in 2022. The plaintiff filed a declaratory action, appealed here, seeking judicial determination that the Senior deed of trust was extinguished upon recording of the loan modification agreement and that the plaintiff held title free of the lien of the Senior deed of trust.

The defendants only challenged the issue of lien priority in this appeal. The plaintiff argued that the recording of the LMA caused provisions of N.C.G.S. Section 47-20 to extinguish the defendants' senior lien and raise the Junior deed of trust to a first priority lien. The plaintiff also contended that the foreclosure of the Junior Deed of Trust extinguished the LMA, and the defendants could no longer foreclose against the real property. The defendants countered that the LMA was a mere extension of the Senior deed of trust and its filing after the Junior deed of trust had no effect on its priority or upon its right to initiate foreclosure proceedings upon default of the loan.

Both the plaintiff and defendants agreed that there were no genuine disputed issues of the facts and solely sought review of whether the trial court was in error in its determination of the applicable law. The opinion states: "Accordingly, under a de novo review, we 'consider the matter anew and freely substitute our own judgment for that of the lower court.'' N.C. Farm Bureau Mut. Ins. Co. v. Herring, 385 N.C. 419, 422 (2023) (cleaned up)." The Court of Appeals agreed with the defendants' argument that the trial court erred in its summary judgment order enjoining the foreclosure of the Senior deed of trust and quieting title to the plaintiff, free and clear of the Senior deed of trust and by determining as a matter of law that the modified Senior deed of trust was extinguished upon the foreclosure of the Junior deed of trust. Their reasoning follows.

The plaintiff contended that the recording of the LMA literally extinguished the Senior deed of trust upon its recording, that its Junior deed of trust stepped into a senior lien position and that the foreclosure of the Junior deed of trust had the effect of extinguishing all liens junior to it including the LMA because it was recorded after the Junior deed of trust. Section 47-20 states:

No deed of trust or mortgage of real or personal property, or of a leasehold interest or other chattel real, or conditional sales contract of personal property in which the title is retained by the vendor, 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 as provided in this Article . . . . Unless otherwise stated either on the registered instrument or on a separate registered instrument duly executed by the party whose priority interest is adversely affected, (i) instruments registered in the office of the register of deeds shall have priority based on the order of registration as determined by the time of registration, and (ii) if instruments are registered simultaneously, then the instruments shall be presumed to have priority as determined by:

(1) The earliest document number set forth on the registered instrument.
(2) The sequential book and page number set forth on the registered instrument if no document number is set forth on the registered instrument.

N.C.G.S. § 47-20 (2023) (emphasis added).

The plaintiff also contended that the defendants should have sought a subordination agreement and the failure to do so resulted in the Junior deed of trust stepping into a first lien position. The Court of Appeals deemed this argument "flawed in multiple ways", explaining that:

First, we address the interpretation of section 47-20. Plaintiff argued the portion of the statute that states, "Unless otherwise stated either on the registered instrument or on a separate registered instrument duly executed by the party whose priority interest is adversely affected," means defendants should have sought a subordination agreement from the junior lienholder to maintain their senior lien position. Whereas defendants argue this language is an exception to the statute's general requirements for establishing priority. Defendants argue the exception simply allows that "in the event there is a separate registered instrument that changes the priority interest of an affected party, then that instrument would control." Upon review of the statute, we determine plaintiff's interpretation goes well beyond the plain language of the statute. Plaintiff cites no binding case law to support their interpretation. "Statutory interpretation properly begins with an examination of the plain words of the statute. If the statutory language is clear and unambiguous, the court eschews statutory construction in favor of giving the words their plain and definite meaning." Belmont Ass'n, Inc. v. Farwig, 381 N.C. 306, 310 (2022) (cleaned up). "Courts should give effect to the words actually used in a statute and should neither delete words that are used nor insert words that are not used into the relevant statutory language during the statutory construction process." N.C. Farm Bureau Mut. Ins. Co. v. Dana, 379 N.C. 502, 510 (2021). "[S]tatutes should be construed so that the resulting construction 'harmonizes with the underlying reason and purpose of the statute.'" Id. (citation omitted).

The Court agreed with the defendants' contention that the plain language of the statute creates an Exception for priority where parties enter into a subordination agreement or any other agreement that alters recording priority. It observed that application of the plaintiff's interpretation would require it to insert languages that had not been used, "would contravene the previously stated statutory interpretation precedence" and was unwilling to "go against precedence to support an interpretation that requires word surplusage and clashes with the underlying reason and purpose of the statute."

The opinion addressed plaintiff's argument regarding the effect the LMA had on the priority of the Senior deed of trust in harmony with the consistent line of North Carolina cases on the priority of modification. The court observes that the argument:

...is a very simplistic and inaccurate application of section 47-20 that disregards what a Deed of Trust is and what a Loan Modification is. "A deed of trust is a three-party arrangement in which the borrower conveys legal title to real property to a third party trustee to hold for the benefit of the lender until repayment of the loan." Skinner v. Preferred Credit, 361 N.C. 114, 120 (2006). "When the loan is repaid, the trustee cancels the deed of trust, restoring legal title to the borrower, who at all times retains equitable title in the property." Id. at 121. Black's Law Dictionary defines a modification in the context of contract law as "a change to something, an alteration or amendment." Modification, Black's Law Dictionary (12^th ed. 2024). Looking at these definitions, we recognize a loan modification is not an instrument to convey title on its own like a deed of trust and does not exist separate and apart from the instrument it modifies.

The opinion states that there: "... is currently no North Carolina case law that directly addresses the present issue." This Court in its opinion examines the statutory provisions it deemed applicable:

In Chapter 45 of the North Carolina General Statutes on Mortgages and Deeds of Trust, section 45-36.24 provides for extension of maturity dates in security instruments beyond the general statutory limits. Specifically, section 45-36.24 states in part:

(b) Automatic Lien Expiration. [U]nless the lien of a security instrument has been extended . . . , the security instrument has been foreclosed, or the security instrument has been satisfied of record pursuant to G.S. 45-37, the lien of a security instrument automatically expires, and the security instrument is conclusively deemed satisfied of record pursuant to G.S. 45-37 . . . 15 years after the maturity date [of the secured obligation stated in the security instrument.]...
(c) Methods To Extend a Lien.--The lien of a recorded security instrument may be extended one or more times by recording (i) a lien maturity extension agreement or (ii) a notice of maturity date. . . . A lien maturity extension agreement or notice of maturity date is ineffective unless recorded before the lien expires. The lien of the original security instrument may not be extended to a date more than 50 years after the date the security instrument was originally recorded in the office of the register of deeds without the written agreement of the then owner of the property encumbered by the lien of the security instrument.
(d) Lien Maturity Extension Agreement.--
(1) The lien of a recorded security instrument may be extended to a date specified in a lien maturity extension agreement, provided the lien maturity extension agreement is recorded before the lien expires. When a lien maturity extension agreement has been duly recorded, the lien of the security instrument will expire on the date specified in the lien maturity extension agreement.
(2) A document (including any document that modifies, amends, or restates a security instrument) is a lien maturity extension agreement[.]

N.C.G.S. § 45-36.24(b), (c), (d) (2023).

The opinion observes that the statute plainly provides for an extension of the maturity date in security instruments. It notes that the statute explicitly provides that a maturity date in a deed of trust does not expire until fifteen years from the maturity date at a minimum and per N.C.G.S. Section 45-36.24(c), the parties may extend the maturity date beyond the statutory limitations with a properly recorded lien maturity extension agreement. The statute avoids quibbling over language characterizing such agreements by stating that a "document (including any document that modifies, amends, or restates a security instrument) is a lien maturity extension agreement[.]"

North Carolina case law, examined in the opinion, established a distinction between a satisfaction and a renewal for deeds of trust and mortgages. It cites:

A new note, where not given in payment, but merely in renewal does not change the original debt. Cable v. Hardin Oil Co., 10 N.C. App. 569, 575 (1971). "Where a note is given merely in renewal of another note, and not in payment, the renewal does not extinguish the original debt nor in any way change the debt, except by postponing the time of payment." W.R. Grace & Co. v. Strickland, 188 N.C. 369, 372 (1924). 1 However, in the case that the "second note be given and accepted in payment of the debt, and not in renewal of the obligation, a different principle will apply." Id. In the case of a mortgage or deed of trust settlement, "by [the mortgagor's] settlement and taking a new note in settlement, with a mortgage to secure it, the [prior mortgage is] discharged, bec[omes] extinct, and the [mortgagee] los[es] [its] lien under it[.]" Smith v. Bynum, 92 N.C. 108, 110 (1885). "The substitution of one note and mortgage for another will not discharge the lien of the original note and mortgage unless the latter is surrendered to the mortgagor or canceled of record. It is only a renewal or acknowledgment of the same debt." Wilkes v. Miller, 156 N.C. 428, 431 (1911).

(Footnote 1 "[T]he word 'renewal' or 'renewed' signifies more than the substitution of one obligation for another. It means the substitution in place of one engagement of a new obligation on the same terms and conditions-that is, the re-establishment of a particular contract for another period of time." Id.

The opinion goes on to construe the effect of a loan modification on the original deed of trust under contract law giving effect tot eh plain language of the LMA where it states:

Nothing in this Agreement shall be understood or construed to be a satisfaction or release in whole or in part of the Note and Security Instrument.
Except where otherwise specifically provided in this Agreement, the Note and Security Instrument will remain unchanged, and Borrower and Lender will be bound by, and comply with, all of the terms and provisions thereof, as amended by this Agreement.
...
This Security Instrument secures to Lender: (a) the repayment of the debt evidenced by the Note, with Interest, and all renewals, extensions and modifications of the Note.

The language leads to its conclusion that:

The plain language of the Senior Deed of Trust and the Loan Modification demonstrates that the parties to the loan intended to modify the Senior Deed of Trust, not extinguish it. The Senior Deed of Trust included a provision to allow for modification; the Loan Modification only extended the maturity date and recapitalized the principal amount to reflect the remaining principal amount from the Senior Deed of Trust. The plain language in the Loan Modification states its purpose is to supplement the Senior Deed of Trust. According to the terms in the Loan Modification, all other terms in the Senior Deed of Trust that were not modified remain in effect. Accordingly, the Loan Modification was a supplement to the Senior
Deed of Trust and did not extinguish the original lien. (Emphasis added by editor)

The Court then goes on to apply its construction of the terms of the Restatement (Third) of Property section 7.3(b). The terms are generally followed among multiple jurisdictions. See Mortgages and deeds of trust-Modification, 2 N.C. Real Estate § 21:87 (3rd ed.). Having already discussed the statutes and laws related to deeds of trust and loan modifications in North Carolina, we determine that the Restatement (Third) of Property section 7.3(b) properly applies within our established jurisprudence. Section 7.3(b) states the following:

If a senior mortgage or the obligation it secures is modified by the parties, the mortgage as modified retains priority as against junior interests in the real estate, except to the extent that the modification is materially prejudicial to the holders of such interests and is not within the scope of a reservation of right to modify[.] Restatement (Third) of Property (Mortgages) § 7.3(b) (1997).

Applied to the present case-the Senior Deed of Trust did not lose its priority at the time it registered the Loan Modification. A junior lienholder is charged with notice when there is an unsatisfied mortgage of record to the property. Collins v. Davis, 132 N.C. 106, 112 (1903). Plaintiff, the junior lienholder, is also charged with inquiry notice because "inquiry of the mortgagee would have elicited information that the mortgage was still in force as between the original parties." Id. at 113.

The Court dealt with the plaintiff's argument that its foreclosure cut off the defendant's deed of trust. "Because the Senior Deed of Trust was not discharged or extinguished by the Loan Modification, the Senior Deed of Trust, as modified by the Loan Modification, remained in a first lien position in the chain of title." Further explaining: "the foreclosure proceedings of the Senior Deed of Trust were improperly enjoined, and the Senior Deed of Trust, as modified, was improperly extinguished by the trial court." The Court also concluded that the LMA was not a novation as argued by the plaintiff which would have extinguished the Senior deed of trust. Further on the issue of whether the modification was prejudicial:

Although plaintiff argues the Loan Modification was materially prejudicial, it is enough to say plaintiff was not prejudiced in this case. An extension of the maturity date did not prejudice the Junior Deed of Trust considering the statutory expiration of the Senior Deed of Trust was fifteen years beyond the 21 January 2014 maturity date. The initiation of foreclosure proceedings for the Senior Deed of Trust in 2022 was well within the fifteen-year statutory expiration timeframe even without any modification.

Thus, in this unanimous opinion, the Court of Appeals remanded the case to the trial court to grant the defendants' motion for judgment on the pleadings, and for entry of an order consistent with its opinion. Practitioners finding a junior lien foreclosed before a senior lien that has been modified after the recording of the junior lien in a title search should take some comfort that the courts of our state have been consistent with few exceptions in maintaining priority. The North Carolina Supreme Court has consistently held that a deed of trust executed as security for a debt will secure all renewals of the debt unless a different intent appears in the documents. Wachovia Nat'l Bank v. Ireland, 122 N.C. 571, (1898) can be cited for this basic doctrine as applicable in North Carolina. There, the North Carolina Supreme Court said; "The deed contains a covenant that the charge shall be binding for all renewals of the debts specified. This would be so without any agreement, unless a different intent appeared."). Our Supreme Court has further held, "Where a note is given merely in renewal of another note and not in payment thereof, the effect is to extend the time for the payment of the debt without extinguishing or changing the character of the obligation[.]" Dyer v. Bray, 208 N.C. 248, 248, 180 S.E. 83, 83 (1935). Accordingly, a promissory note executed as a renewal only operates as an extension of time for payment and will continue to be secured by a deed of trust that secures the original debt, unless a contrary intent appears.

There are a couple of exceptions that should be observed. In Re: Foreclosure of Hall, 236 N.C. App. 544, (2011) makes it clear that if the express terms of the security instruments make no express provision for renewal, this doctrine will not afford a continuation of priority. The opinion also makes it clear that where the security instruments provide for an explicit last date for advances, advances made after that date will not have priority over a junior lien of record prior to a modification.

The current opinion seems to assume that a modification that is intended to retain priority may be controlled by whether or not its terms "materially prejudice" the interests of junior lienholders. Under this doctrine, if the modification does not materially prejudice the interests of junior lienholders, then the priority of the original deed of trust should remain unchanged and this Court so concluded in this case.

North Carolina case law is not entirely clear on the issue of what happens when material prejudice is found to exist and there are two principle theories in this regard. One view is that the debt created under the original terms retains its original priority and the portion of the debt that results under the modified terms enjoys priority only from the date of the modification's recording. This theory has not been explicitly adopted in North Carolina, but the reasoning was followed in McNeary's Arborists, Inc. v. Carley Capital Group. In that opinion the Court of Appeals held that where the time period for making future advances under a deed of trust was extended by a modification made after the expiration of the original date for advancements any advances made after the expiration of the original date to make advances were subject to an intervening lienholder's priority. The Court found that only those obligations incurred during the original term enjoyed priority back to the recordation date. McNeary's Arborists, Inc. v. Carley Capital Group, 103 N.C. App. 650, 406 S.E. 2d 644 (1991).

Under another theory, discussed in The Restatement (Third) of Property: Mortgages Section 7.3, the existence of a provision in the original loan agreement and deed of trust reserving the right to modify would allow modifications to maintain the original priority for all debt, whether created by the terms of original agreement or by the modification. Under this theory, material prejudice is recognized, but the doctrine is limited by the express terms of the agreement. The Restatement provides:

(b) If a senior mortgage or the obligation it secures is modified by the parties, the mortgage as modified retains priority as against junior interests in the real estate, except to the extent that the modification is materially prejudicial to the holders of such interests and is not within the scope of a reservation of right to modify as provided in Subsection (c).
(c) If the mortgagor and mortgagee reserve the right in a mortgage to modify the mortgage or the obligation it secures, the mortgage as modified retains priority even if the modification is materially prejudicial to the holders of junior interests in the real estate, except as provided in Subsection (d).
(Subsection (d) allows the mortgagor to issue a notice terminating the right to modify to the mortgagee. Once terminated, prejudicial modifications will no longer retain the original priority.)

In light of the reliance upon this section of the Restatement by this Court in its opinion, it does not appear that the adoption of this view by our North Carolina courts can be ruled out.

It should be noted The Uniform Law Commission has approved the final version of the Uniform Mortgage Modification Act. Where adopted, that The Act applies only to the following "safe harbor" modifications of a mortgage loan, which the Committee determined would not materially prejudice holders of junior interests:

1. Extension of the maturity date of the secured loan;
2. Decrease in the interest rate of the secured loan;
3. If the change does not result in an increase in the interest rate as calculated on the date the modification becomes effect, (a) a change to a different nationally-recognized index if the previous index is no longer available, (b) a change in the differential between the index and the interest rate, (c) a change from a floating or adjustable rate to a fixed rate, and (d) a change from a fixed rate to a floating or adjustable rate based on a nationally-recognized index;
4. Capitalization of unpaid interest;
5. Forgiveness, forbearance or other reduction of principal, accrued interest or other monetary obligation;
6. Modification of a requirement for maintaining an escrow or reserve account for payment of taxes, insurance premiums or another obligation;
7. Modification of a requirement for acquiring or maintaining insurance;
8. Modification of an existing condition to advance funds;
9. Modification of a financial covenant; and,
10. Modification of a payment amount or schedule resulting from any of the foregoing.

Adoption of this Act in North Carolina would legislatively settle the debate.