Belverd v. Miles, ___ NCApp. ___ (2002) (NO. COA01-1108)

This case involves the question of whether adjoining property owners are prohibited by restrictive covenants limiting property to residential use from using a deeded strip of land, located on a lot in a subdivision, to construct a through-street. The trial court held that the restrictive covenants do not prohibit the use of the land in question to construct the street. Judges McGee, Wynn and Lewis affirmed in a, well reasoned, unanimous opinion. This case should deserve more than a casual summary comment due to the increasing frequency that the fundamental issue arises. Without an appellate opinion clearly on point, some title insurers may have been reluctant to insure access predicated on similar facts. Arguably, the outcome of this appeal should have been anticipated. Nonetheless, title insurers can not reasonably be expected to be eager to fund the litigation required to resolve the question considering the typical premium paid for a policy.

The following facts are among those set out in the opinion as undisputed. "The Partridge Bluff subdivision (Partridge Bluff) is a single-family, residential subdivision in Concord, Cabarrus County, North Carolina … The original owners of Partridge Bluff, Allan D. Miles and Wanda M. Miles (the Mileses), executed and recorded "Protective Covenants and Restrictions for the Subdivision of Partridge Bluff" (the Covenants) for Section I of Partridge Bluff at Book 527, Page 93 in the Cabarrus County Registry. The Mileses conveyed Lot 30 to the predecessor-in-title of plaintiffs in 1983. Lot 30 fronts on Bridlewood Place (a public street) and is directly across from Lot 1. The Mileses also owned a large tract of land adjacent to Partridge Bluff (the Sycamore Property). The Mileses conveyed the Sycamore Property and a certain portion of Lot 1 of Partridge Bluff (together the Sycamore Tract) to defendant Sycamore Properties by deed (the Sycamore Deed) dated 26 January 1988. The Sycamore Deed identifies the portion of Lot 1 conveyed to Sycamore Properties as being sixty feet in width and 385 feet in length (the Lot 1 Strip). One of the purposes of including the Lot 1 Strip in the Sycamore Deed was ‘to provide access to the Sycamore Tract directly from Bridlewood Place, a public street.’…. In March 1999, the Developers began to construct a through-street across the Lot 1 Strip in order to connect the Coldwater Subdivision on the Sycamore Tract to Bridlewood Place in Partridge Bluff, Section I.

Plaintiffs filed a complaint against the Developers and the Mileses on 5 May 2000, setting forth various causes of action, requesting declaratory judgment, and seeking to prevent continued construction of the through-street. The Developers and the Mileses filed answers denying the allegations and asserting affirmative defenses of laches and estoppel. The trial court entered a temporary restraining order in June 2000 and subsequently entered a preliminary injunction, specifically enjoining the use of the through-street for access to the commercial portion of Coldwater. … Plaintiffs filed one motion for summary judgment as to all of their claims, and a second motion for summary judgment as to the Developers' affirmative defenses of laches and estoppel. Plaintiffs also filed a motion to join necessary parties. The Developers filed a motion for summary judgment as to all of plaintiffs' claims. Following a hearing, the trial court entered an order on 16 April 2001 that dissolved the preliminary injunction, granted the Developers' motion for summary judgment on all claims, and denied all of plaintiffs' motions, holding that the Developers’, use and intended use of the disputed portion of Lot 1 does not violate, complies with and is permitted by [the covenants].’"

The plaintiffs first argued that the trial court erred in granting summary judgment in favor of the Developers. This argument applied to their claim seeking injunctive relief based on the allegation of violation of the covenant restricting use of the lots to residential purposes and to their claim seeking a declaratory judgment. The plaintiffs contended that the covenants prohibited the Developers' use of the Lot 1 strip as a through street. The Court of Appeals disagreed.

The first paragraph of the restrictions in the covenants provides that "No lot shall be used for other than residential purposes." In contrast, paragraph 13 provides that "No lot shall be used for the purpose of constructing a public street or to provide access to and from the properties located in the subdivision of Partridge Bluff, Section One, to property surrounding Partridge Bluff, Section One, except with the written consent and permission of Allan D. Mileses and wife, Wanda M. Mileses, their heirs and assigns."

The Court observes that the two provisions, each standing alone, are not ambiguous. Taken together, they are in conflict as to whether part of a lot may be used as a street to serve property outside of the subdivision. The Court sites, Easterwood v. Burge, 103 N.C. App. 507, 405 S.E.2d 787, (1991); and Franzle v. Waters, 18 N.C. App. 371, 197 S.E.2d 15, (1973) for the principle that a covenant restricting property to "residential purposes only" prohibits construction of an access road to a separate tract. This interpretation is so well established that it has given rise to malpractice liability for advising to the contrary. Paragraph 13 permits such use upon receipt of written consent by the declarants.

The plaintiffs argued that paragraph 13 was not intended to be taken as a modification of the express prohibition against using lots for non- residential purposes in paragraph 1. They argued that it was only intended to "add an additional layer of protection." The Court of Appeals notes that if "paragraph thirteen is not construed as modifying paragraph one, then, pursuant to paragraph one, no lot could ever be used to construct a public street because such use is not residential, and paragraph thirteen, purporting to allow such use if the Mileses give written consent, would be superfluous. We believe such an interpretation of the covenants would be contrary to the applicable rules of interpretation."

The Court moves through an analysis of the rules of construction and concludes that "paragraph thirteen was intended to modify the general prohibition of paragraph one by providing that lots could be used for the specific non-residential purpose of constructing a public street upon obtaining consent from the Mileses in writing. Furthermore, we note that this construction comports with the well-established principle that when the meaning of covenants purporting to restrict the free use of property is in doubt, such covenants are to be construed in favor of the unrestricted use of property. See Long v. Branham, 271 N.C. 264, 268, 156 S.E.2d 235, 239 (1967)."

The Court of Appeals disposed of the plaintiffs' argument that the trial court erred in denying their motion to join all other lot owners as necessary parties with the following statement of the law. "Plaintiffs rely solely upon the case of Karner v. Roy White Flowers, Inc., 351 N.C. 433, 527 S.E.2d 40 (2000), for the proposition that the trial court should have joined as necessary parties all of the lot owners and the City of Concord. However, plaintiffs' reliance upon Karner is misplaced. That case involved a "determination of whether a change of circumstances has taken place so as to void a restrictive covenant in equity[.]" Id. at 437, 527 S.E.2d at 43. The case before us involves no such determination, but rather involves the determination of whether a certain use of the land in question violates the applicable restrictive covenants. Having found no authority to support plaintiffs' proposition, we affirm the trial court's ruling on this issue."

Where there is a clear statement of the declarants' right to modify restrictive covenants in harmony with the general import of the declaration, our courts have consistently enforced that right. The primary limitations on the reservation of rights are that they must be reasonable, in harmony with the plan of development and not arbitrary or effect a material change. The right in this instance was well defined and, by implication, defined the plan of development as anticipating development and providing access beyond the boundaries of the subdivision. In the future, access that is dependent upon such provisions should be readily insurable where it has been in place and used for a significant period of time. Proposed construction of access will likely require closer examination of the operative facts.

In re Country Lake Enterprises, INC., U.S.B.C., E.D.N.C., Case No. 02-00980-5-ATS

For many years, we have felt somewhat like Chicken Little in warning real property practitioners about potentially remote problems. The sky appears to have finally fallen on the problem created by the interplay between the time limitations set out in the Article 2A foreclosure procedures of Chapter 45 and the legal holidays set out in NCGS Sec. 103-4. In this Eastern District Bankruptcy case, Judge Small has ruled that where the tenth day of the raised bid/redemption period falls on March 25, it does not expire until the close of business of the next day. As a result, the trustee’s deed was voided and the property is part of the bankruptcy estate where the bankruptcy petition was filed at 5:22 P. M. on March 25, 2002. This result arises because NCGS Sec. 45-21.27 "specifically provides that if the tenth day of the upset bid period is a legal holiday, the necessary deposit and notice may be filed on the following day." In this instance, NCGS Sec. 103-4(3)(a) specifies that Greek Independence Day, which falls on March 25, is a legal holiday in North Carolina.

Article 2A provides that a foreclosure sale may not be conducted on a legal holiday as well. 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.

Robert E. Lee's Birthday (January 19), Greek Independence Day (March 25), Anniversary of signing of Halifax Resolves (April 12), 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 or on which an upset bid will not expire. Many of these legal holidays are not observed with a 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. The court in this case acknowledged this fact in its refusal to impose sanctions upon the creditors for violation of the stay. In Addition, G.S. 103-4(b) states that whenever a public holiday shall fall upon a Sunday, the following Monday shall be a public holiday. This Sunday extension provision creates a further complication in determining appropriate dates.

IRS Code Section 1031 Deferral May Apply to Peanut Quota Buyout

The Farm Security and Rural Investment Act of 2002 abolishes the peanut quota system and provides for a buyout for quota holders. The payments provided for under the buyout will be taxable as income. IRS Notice 2002–67 provides that if the quota holder used the quota in the trade or business of farming and, on May 13, 2002, the quota holder’s holding period for the quota was more than one year, then the transaction may me treated as an installment sale and reported as a section 1231 transaction. Consistent with prior Revenue Rulings and Tax Court decisions the notice states that "A peanut quota is considered an interest in land." The notice imposes a reporting requirement and notes that the payments "will be reported by USDA on Form 1099–S for 2002 if the amount is $600 or more."

While the notice and prior rulings do not deal with the availability of Section 1031 treatment for the sale of quotas, such treatment would be consistent with other similar interests that have been approved as eligible for deferral of gain or loss. Logically, the buyout payments should be eligible for Section 1033 treatment and the extended three- year replacement period. The notice, however, provides that the buyout of the peanut quotas under the Act is not an involuntary conversion of the quotas. This does not seem correct in that the buyout is mandated by Congress and is not voluntary. As there is no contextual support for this statement, we are inclined to infer that the Service may be planning to not allow Section 1033 treatment. This does not seem to be consistent with prior treatment of similar interests in land.

If you have any questions, or if you want to discuss these issues, please contact Chris Burti at (800) 522-8694.