In re Lucks

• Decision Date: 21 December 2016
• Docket Number: No. 162A16,162A16
• Citation: 794 S.E.2d 501
• Court: North Carolina Supreme Court
• Parties: In the Matter of Foreclosure of a Deed of Trust Executed By Gordon F. Lucks Dated July 14, 2006 and recorded in Book 4254, Page 96 in the Buncombe County Public Registry

794 S.E.2d 501

In the Matter of Foreclosure of a Deed of Trust Executed By Gordon F. Lucks Dated July 14, 2006 and recorded in Book 4254, Page 96 in the Buncombe County Public Registry

No. 162A16

Supreme Court of North Carolina.

Filed December 21, 2016

Troutman Sanders LLP, Raleigh, by D. Kyle Deak, for petitioner-appellee Deutsche Bank National Trust Company, Trustee.

Ferguson, Hayes, Hawkins & DeMay, PLLC, Concord, by James R. DeMay, for respondent-appellant.

NEWBY, Justice.

The contractual right of foreclosure by power of sale under a deed of trust is a non-judicial proceeding. In the comprehensive statutory framework governing nonjudicial foreclosure by power of sale set forth in Chapter 45 of our General Statutes, the General Assembly has prescribed certain minimal judicial procedures, including requiring notice and a hearing designed to protect the debtor's interest. The hearing official then authorizes the foreclosure to proceed or refuses to do so. In this informal setting, a creditor must establish, among other things, the existence of a debt, default, and its right to foreclose, and a debtor may raise evidentiary challenges. The Rules of Civil Procedure applicable to formal judicial actions do not apply. The debtor has the option to file a separate judicial action to enjoin the foreclosure.

Here, because the creditor failed to establish the substitute trustee's authority to foreclose under the deed of trust, the trial court properly refused to authorize the creditor to proceed with the foreclosure. Nonetheless, the trial court erroneously entered a "dismissal with prejudice." The refusal to authorize the creditor to proceed is not a "dismissal"; it does not implicate res judicata or collateral estoppel in the traditional sense. While the creditor may not proceed with non-judicial foreclosure on the same default, it may proceed on the same default through foreclosure by judicial action. The creditor may also proceed non-judicially under power of sale based upon a different default. Because the Court of Appeals erred by finding that the creditor established the successor trustee's authority to proceed under the deed of trust, we reverse the decision of that court, which reversed the trial court's evidentiary ruling.

In July 2006, Gordon F. Lucks (borrower) executed a promissory note with IndyMac Bank, F.S.B. (the Note) in the principal amount of $225,000 to purchase real property situated in Buncombe County. The debt is repayable through monthly installments, with each payment due on the first of the month, and matures on 1 August 2036. The Note includes default and acceleration provisions.

At the same time, borrower executed a deed of trust on the property, naming Robert P. Tucker II as trustee, which was recorded with the Buncombe County Register of Deeds. The deed of trust provides for non-judicial foreclosure by power of sale. Deutsche Bank National Trust Company (Deutsche Bank)¹ currently holds the Note and asserts that borrower "has not paid any amount due and owing under the Note since October 1, 2010."

In September 2013, the Ford Firm, acting as substitute trustee under the deed of trust, initiated a hearing for non-judicial foreclosure under N.C.G.S. § 45–21.16 for borrower's failure to make payments. The Assistant Clerk of Superior Court, Buncombe County "dismissed" the case for failure to present documentation appointing the Ford Firm as substitute trustee.

In June 2014, Cornish Law, PLLC, now acting as substitute trustee, initiated a new hearing for non-judicial foreclosure based on borrower's failure to make payments.² The Assistant Clerk found proper documentation established that "The Ford Firm was the Trustee at the time of the [prior] dismissal," and since "Cornish Law, PLLC is in privity with The Ford Firm," the "action is barred by Res Judicata" and again "dismissed" the

794 S.E.2d 504

case. Deutsche Bank appealed the matter to superior court. See N.C.G.S. § 45–21.16(d1) (2015).

At the de novo hearing in superior court, Deutsche Bank tendered a series of documents to establish the substitute trustee's right to proceed with non-judicial foreclosure, which included various copies of powers of attorney. One such document, marked "Exhibit 4," is the crucial document at issue in this appeal, without which the substitute trustee lacks authority to act under the deed of trust. The document is purported to be a limited power of attorney appointing a service company to act on Deutsche Bank's behalf, which, in turn, was relied upon to appoint the substitute trustee.³

Deutsche Bank called a witness who testified that she was "employed by" the service company, but Deutsche Bank did not establish her position, role, or duties in the handling of records. Regarding the document marked Exhibit 4, the employee stated that a different firm "prepared the power of attorney," that "normally we record the power of attorneys," and that, "[i]n this case we try to record it to the state ... where the headquarters would be," which she "believe[d] ... would be Charlotte." The City of Charlotte is located in Mecklenburg County.

Deutsche Bank tendered Exhibit 4, which is a photocopy, fourteen pages in length, signed by a Bank officer on 21 November 2013 and notarized. The last page revealed a recording stamp from the Register of Deeds in Montgomery County, not Mecklenburg County, which states the document was recorded in 2010, three years before the purported execution, and that the document is eleven pages in length, not fourteen. Borrower objected to the Exhibit's admission into evidence, noting the "recording information appears to precede the date of signatory on that instrument." Counsel for Deutsche Bank stated that she "believe[d] that was an error in stapling the exhibit." Nonetheless, no witness testified about the discrepancy. Deutsche Bank did not request the trial court take judicial notice of any recorded version of Exhibit 4 or make other arguments for the admission of Exhibit 4.

The trial court sustained borrower's objection to the admission of Exhibit 4 for "failure to provide a proper foundation and hearsay," noting that "the document is internally inconsistent" and "has inconsistent dates." Because Exhibit 4 is essential in establishing the substitute trustee's authority to proceed with the foreclosure, the trial court "dismissed with prejudice" the case for insufficient evidence. Deutsche Bank timely appealed the matter to the Court of Appeals.

In a divided opinion, the Court of Appeals reversed the trial court's dismissal. In re Foreclosure of Lucks , ––– N.C.App. ––––, 785 S.E.2d 185, 2016 WL 1321155 (2016) (unpublished). The majority noted that "the evidentiary rules are slightly more relaxed in the context of a foreclosure hearing than in normal litigation," id. , 2016 WL 1321155, at *2, and concluded that the trial court erred by sustaining borrower's objection to Exhibit 4 "on the basis of lack of ‘proper foundation and hearsay,’ " id. at *3. The dissent opined that any relaxation of the evidentiary rules "is not supported by citation or case law," id. at *4 (Hunter, J., dissenting), and, noting borrower failed to establish alternative means to admit Exhibit 4, concluded the trial court properly excluded the Exhibit, id. at *7. Borrower appeals as a matter of right.

Non-judicial foreclosure by power of sale arises under contract and is not a judicial proceeding. See In re Foreclosure of Michael Weinman Assocs. Gen. P'ship , 333 N.C. 221, 227, 424 S.E.2d 385, 388 (1993) (A power of sale is contractual and allows the creditor to sell the mortgaged property "without any order of court in the event of a default." (quoting James A. Webster, Jr., Webster's Real Estate Law in North Car

794 S.E.2d 505

olina § 281, at 331 (Patrick K. Hetrick & James B. McLaughlin, Jr. eds., 3d ed. 1988))). Though states have adopted differing views,⁴ by at least 1830, North Carolina had allowed power of sale foreclosures under deed of trust. See Harrison v. Battle , 16 N.C. (1 Dev. Eq.) 537, 542 (1830).

The General Assembly has crafted Chapter 45 to be the comprehensive and exclusive statutory framework governing non-judicial foreclosures by power of sale. E.g. , N.C.G.S. §§ 45–21.16 (2015) (notice and hearing requirements), -21.26 (2015) (reporting of sale), -21.27 (2015) (upset bid), -21.29 (2015) (orders for possession); see also Durant M. Glover, Comment, Real Property—Changes in North Carolina's Foreclosure Law , 54 N.C. L. Rev. 903, 913-15 (1976) (discussing the evolution of nonjudicial foreclosure statutes). The Rules of Civil Procedure do not apply unless explicitly engrafted into the statute. E.g. , N.C.G.S. § 45–21.16(a) (requiring service as "provided by the Rules"); see also In re Ernst & Young, LLP , 363 N.C. 612, 620, 684 S.E.2d 151, 156 (2009) (holding that N.C.G.S. § 105–258(a) (2007) prescribed "its own specialized procedure that supplants the Rules"). By establishing an exclusive procedure, non-judicial foreclosure does not require the filing of an action.⁵ Nonetheless, Chapter 45 does require a minimal degree of judicial oversight for the sole purpose of requiring a creditor to establish its right to proceed with the foreclosure. See N.C.G.S. § 45–21.16(d). The creditor must give notice of a hearing. Id. § 45–21.16(a). Given the fluid nature of the debtor-creditor...