BENEFICIAL MORTGAGE CO. OF NORTH CAROLINA INC. v. Barrington

• Decision Date: 04 May 2004
• Docket Number: No. COA03-512.,COA03-512.
• Citation: 595 S.E.2d 705,164 NC App. 41
• Parties: BENEFICIAL MORTGAGE CO. OF NORTH CAROLINA, INC., Plaintiff v. The BARRINGTON AND JONES LAW FIRM, P.A., f/k/a The Barrington Jones and Pikul Law Firm, P.A., Carl A. Barrington, Jr., and Benner Jones, III, Douglas M. Horne, County of Cumberland, a political subdivision of the State of North Carolina, White Mountains Services Corporation, f/k/a Source One Mortgage Services Corporation, Freddie McLean, Kanice Dee McLean and First-Citizens Bank & Trust Company, Defendants.
• Court: North Carolina Court of Appeals

595 S.E.2d 705

164 NC App. 41

BENEFICIAL MORTGAGE CO. OF NORTH CAROLINA, INC., Plaintiff v. The BARRINGTON AND JONES LAW FIRM, P.A., f/k/a The Barrington Jones and Pikul Law Firm, P.A., Carl A. Barrington, Jr., and Benner Jones, III, Douglas M. Horne, County of Cumberland, a political subdivision of the State of North Carolina, White Mountains Services Corporation, f/k/a Source One Mortgage Services Corporation, Freddie McLean, Kanice Dee McLean and First-Citizens Bank & Trust Company, Defendants.

No. COA03-512.

Court of Appeals of North Carolina.

May 4, 2004.

Roberson, Haworth & Reese, P.L.L.C., by Robert A. Brinson, Alan B. Powell and Christopher C. Finan, High Point, for plaintiff appellee.

The Yarborough Law Firm, by Garrison Neil Yarborough, Fayetteville, for Freddie McLean, Kanice Dee McLean and First-Citizen Bank & Trust Company defendant appellants.

McCULLOUGH, Judge.

Before this Court is an appeal from summary judgment granted in favor of Beneficial Mortgage Co. of North Carolina, Inc. ("Beneficial"), on an action to quiet title and set aside a tax foreclosure sale. Issues on appeal relate only to the remaining named defendants Freddie and Kanice Dee McLean and First-Citizens Bank and Trust Company (collectively "defendants").

Mr. Douglas L. Horne and Mrs. Captola E. Horne ("the Hornes") acquired by deed real property in Cumberland County, North Carolina ("the Subject Real Property"), duly recorded on 14 July 1978 in the Cumberland County Registry. On or about 23 August 1990, the Hornes executed and delivered to First Union Mortgage Corporation a deed of trust encumbering the Subject Real Property in the principal amount of $57,050. The deed, also recorded in the Cumberland County Registry, was then assigned and duly recorded to Source One Mortgage Services Corporation ("Source One").

Upon default by the Hornes as to the above-mentioned deed of trust, a substitute trustee ("foreclosure trustee") commenced a foreclosure action in Cumberland County on 20 March 1995. On 15 May 1995, a Report of Foreclosure Sale was filed in the above foreclosure action indicating that the Subject Real Property was exposed to public sale. Source One, being the last and highest bidder at $60,115, purchased the property at the public sale. The sale was conducted in accordance with North Carolina law. On 25 May 1995, prior to the expiration of the 10-day upset bid period, the Hornes filed for Chapter 13 bankruptcy relief under Title 11, triggering, pursuant to 11 U.S.C § 362 (2003), an automatic stay of the foreclosure sale. On 19 June 1995, while the Chapter 13 proceeding was still pending, a Trustee's Deed purporting to convey the Subject Real Property to Source One was executed by the foreclosure trustee of the Source One deed of trust and then recorded on 23 June 1995.

A recall of a Writ of Possession referencing the filing of a bankruptcy proceeding was entered into the Cumberland County Special Proceeding file on 13 July 1995. On 2 August 1995, after learning of the Hornes' Chapter 13 filing, the foreclosure trustee filed a motion in the Bankruptcy Court of the Eastern District of North Carolina to annul the automatic stay triggered by 11 U.S.C. 362 so that the foreclosure sale could be completed. In response to this motion, the Honorable A. Thomas Small, United States Bankruptcy Judge for the Eastern District of North Carolina, while denying an immediate annulment, ordered that: "Should Debtors [Hornes] fail to sell the Real Property and distribute the proceeds on or before January 15, 1996, the automatic stay shall be annulled and Movant will be deemed the owner of the Real Property and entitled to pursue any and all nonbankruptcy remedies to obtaining possession of the Real Property." (Emphasis added.)

At this point, it is easiest to distinguish the competing interests of the Subject Real Property by individually following the two alleged chains of title.

I. Beneficial's Chain of Title

Beneficial alleges, and the trial court agreed, the following represent their legal chain of title: On 18 March 1996, over two months after the 15 January 1996 deadline for annulling the stay as ordered by Judge Small, Doug Horne ("Douglas"), the son of Mr. and Mrs. Horne, entered into a line of credit with Beneficial for the principle amount of $50,000. A general warranty deed recorded on 25 March 1996 conveyed the Subject Real Property from the Hornes to Douglas. In exchange for and in security of this line of credit, a deed of trust was granted in favor of Beneficial for the Subject Real Property, with the deed of trust also being recorded on 25 March 1996. The deed of trust was drawn by David Pikul of the then existing law firm Barrington, Jones, and Pikul Law Firm, P.A ("Barrington Law Firm"). On 16 May 1996, a Certificate of Satisfaction issued in Cumberland County, showed the Hornes had satisfied their debt with Source One. The Barrington Law Firm later drew a second deed of trust in favor of Beneficial for an increased principal amount of $73,600. This second line of credit was drawn in part to pay off the first line of credit and deed of trust. This second deed of trust was duly recorded on 11 April 1997.

Pursuant to this alleged chain of title, Beneficial was granted summary judgment by Judge Weeks' finding, as a matter of law, that Douglas remains the record owner of the Subject Real Property and that his property is subject to the lien of the second deed of trust benefiting Beneficial.

II. Defendants' Chain of Title

The remaining defendants in this appeal argue that the following represents their chain of title: Judge Small's ordered deadline that the Hornes sell their property by 15 January 1996 or else the automatic stay would be annulled pursuant to 11 U.S.C. § 362(d), was not met by the Hornes. By violating Judge Small's order, the foreclosure sale, commenced by the foreclosure trustee without the knowledge that the Hornes had filed for Chapter 13 bankruptcy, was revived; and as of 15 January 1996, Source One was the fee simple owner of the Subject Real Property without any re-advertising or resale.

On 28 September 1999, the County of Cumberland filed a complaint for property tax foreclosure on the Subject Real Property, naming as the only defendant Source One. Cumberland County's title search stopped at the original trustee's deed to Source One. Source One did not respond to the complaint and the Clerk of the Superior Court of Cumberland County made an entry of default on 31 March 2000. The Subject Real Property was sold at a public auction on 31 August 2000, to the last highest bidder, Freddie McLean. A commissioner's deed, conveying this interest in the property to Mr. McLean, as grantee, was recorded on 20 September 2000, in the Cumberland County Registry. First-Citizen holds a deed of trust dated 5 December 2000, recorded 7 December 2000, in the Cumberland County Registry securing a loan of $70,000 to Mr. McLean.

Pursuant to this second alleged chain of title, remaining defendants now appeal the summary judgment order in favor of plaintiff. The gravamen of defendant's argument is based on their reading of the effect of Judge Small's order pursuant to 11 U.S.C. § 362, annulling the stay over the foreclosing trustee's ability to foreclose when the Hornes did not meet the deadline in his order.

On appeal, defendants contend the following: it was error for the trial court not to grant their motion for judgment on the pleadings; the trial court erred by denying the three remaining defendants'—the McLeans and First-Citizens—motion for summary judgment; and the trial court erred in granting summary judgment in favor of Beneficial.

The key issue in this case concerns the relationship between North Carolina foreclosure law and federal bankruptcy law as implicated by the undisputed facts. In the first section of our opinion we examine the requirements of North Carolina law on the lifting of the stay. The second portion of the opinion examines the validity of Beneficial's alleged chain of title. Lastly, we consider defendants' argument that this action, seeking both to quiet title and relief from a tax foreclosure sale, is barred by judicial estoppel. Pursuant to our analysis of these issues, we find the trial court correctly ordered summary judgment in favor of Beneficial.

North Carolina Power of Sale Foreclosure as Affected by the Federal Bankruptcy Code

I. Fixed Rights from a Foreclosure

After a foreclosure sale conducted under a power of sale clause has been completed and reported to the clerk of the superior court, North Carolina law allows the equivalent of an equity court's power to decree a resale upon the filing of a substantially raised bid. From the date the sale is reported to the superior court clerk, a 10-day upset bid period is triggered allowing a bid meeting statutory requirements to upset the last highest bid and sale. N.C. Gen.Stat. § 45-21.21 (2003). Therefore, it has long been held in North Carolina that under the state's foreclosure statutes, the final and highest bidder at a foreclosure sale is merely a proposed purchaser who has no rights, or entirely voidable rights, to the property until the upset bid period terminates. Cherry v. Gilliam, 195 N.C. 233, 234, 141 S.E. 594, 594 (1928). Our Supreme Court has also held that a foreclosure sale "cannot be consummated" to fix rights until the expiration of the upset bid period. Building & Loan Assn. v. Black, 215 N.C. 400, 402, 2 S.E.2d 6, 6 (1939). Accordingly, Judge Small of the Eastern District of North Carolina U.S. Bankruptcy Court has determined that, for bankruptcy purposes, "in North Carolina, a property has not been `sold at foreclosure sale' under 11 U.S.C.§ 1322(c)(1) until all of the state procedural requirements for completion of the sale, including the expiration of the upset bid period, have been met." In re Barham, 193 B.R. 229, 232 (Bankr.E.D.N.C. 1996).

The automatic stay provision of 11 U.S.C. § 362 of the ...