Branch Banking and Trust Co. v. Kenyon Inv. Corp., 8427SC1033

• Decision Date: 16 July 1985
• Docket Number: No. 8427SC1033,8427SC1033
• Citation: 76 N.C.App. 1,332 S.E.2d 186
• Court: North Carolina Court of Appeals
• Parties: BRANCH BANKING AND TRUST COMPANY (formerly Independence National Bank) v. KENYON INVESTMENT CORPORATION; Garson Rice; Thomas A. Robinson, Substitute Trustee; and Sunstates Corporation.

Page 186

332 S.E.2d 186

76 N.C.App. 1

BRANCH BANKING AND TRUST COMPANY (formerly Independence National Bank) v. KENYON INVESTMENT CORPORATION; Garson Rice; Thomas A Robinson, Substitute Trustee; and Sunstates Corporation.

No. 8427SC1033.

Court of Appeals of North Carolina.

July 16, 1985.

Mullen, Holland & Cooper by Raboteau T. Wilder, Jr. and William E. Moore, Jr., Gastonia, for plaintiff-appellant.

Tuggle, Duggins, Meschan & Elrod by David F. Meschan and Henry B. Mangum, Jr., Greensboro, for defendant-appellees.

EAGLES, Judge.

The question presented by this appeal is whether BB & T may foreclose on the deed of trust to the real property acquired by Kenyon and Rice from the Gardners through foreclosure. For the reasons set out below, we hold that BB & T has the right to foreclose on the land and that they were entitled to summary judgment in their favor.

I.

Prior to the foreclosure by Kenyon and Rice (hereafter collectively referred to as Kenyon), Independence National Bank (Independence) held a recorded deed of trust to the property as security for a $152,000 promissory note on which Max Gardner was the principal obligor, having assumed the obligation from Sonny Hancock. Gardner Land Company, Independence's predecessor in title to the deed of trust, consented to the assumption. Kenyon held a second deed of trust on the same land as partial security for a $500,000 debt owed by Max Gardner and his wife. The second deed of trust recited specifically that it was subject to the first deed of trust.

In this situation, the relationship of the parties with respect to one another is well-established. Independence held legal title to the land and Gardner held the beneficial title or an equity of redemption. Riddick v. Davis, 220 N.C. 120, 16 S.E.2d 662 (1941). As between Gardner and Hancock, (the original mortgagor), Gardner was the principal debtor on the note held by Independence and Hancock was the surety. Keen v. Parker, 217 N.C. 378, 8 S.E.2d 209 (1940); Rector v. Lyda, 180 N.C. 577, 105 S.E. 170, 21 ALR 411 (1920). The assumption agreement between Gardner and Hancock inured to the benefit of Independence, who was entitled as a third party beneficiary to maintain an action for enforcement of the agreement. Beaver v. Ledbetter, 269 N.C. 142, 152 S.E.2d 165 (1967); Baber v. Hanie, 163 N.C. 588, 80 S.E. 57 (1913). Gardner Land Company's consent to the agreement, which was binding on Independence, recognized the principal-surety relationship between Gardner and Hancock and likewise recognized Gardner's personal liability on the note while essentially releasing Hancock. Keen v. Parker, supra. State-Planter's Bank and Trust v. Randolph, 207 N.C. 241, 176 S.E. 561 (1934). See generally, 9 N.C. Index 3d, Mortgages, Sections 15-15.3 (1977 and Supp.1984); Hetrick, Webster's Real Estate Law in North Carolina, Section 269 (Rev. ed. 1981); 59 C.J.S. Mortgages, Section 408 (1949); 55 Am.Jur.2d Mortgages, Section 1037 (1971).

The deed of trust held by Kenyon was, as noted above, expressly subject to the deed of trust held by Independence. Under established law, whatever rights Kenyon had in the subject property by virtue of the deed of trust would be subject to the Hancock deed of trust held by Independence. 55 Am.Jur.2d Mortgages, Section 1038. See Weil v. Casey, 125 N.C. 356, 34 S.E. 506 (1899); Vanstory v. Thornton, 112 N.C. 196, 17 S.E. 566 (1893) (rights of prior judgment creditors not affected by subsequent execution of mortgage in favor of third party). The nature of the interest possessed by Kenyon by virtue of the deed of trust is less clear. The Hancock note provided that no assumption would be allowed without the holder's consent. Accordingly, Kenyon, whose interest was subject to the prior mortgage, did not have a clear right to step into the shoes of the Gardners with respect to the note in the event they succeeded to the Gardners' equitable interest in the land. While a mortgagee may not impose restrictions on the alienability of property subject to a deed of trust, the deed of trust may contain a due on sale clause that permits the mortgagee to accelerate the mortgage for the purpose of negotiating more favorable terms, such as a higher interest rate, with the transferee. Crockett v. Savings and Loan Association, 289 N.C. 620, 224 S.E.2d 580 (1976). The Hancock deed of trust provided that if any of its terms or the terms of the note were violated, the note would, at the holder's option, be due and payable. Thus, Kenyon's interest in the Gardner equity would preserve for him a good bargaining position for renegotiating the mortgage terms.

II

When the Gardners defaulted on the Kenyon note, Kenyon foreclosed and purchased the Gardners' interest at the foreclosure sale, succeeding the Gardners as the holders of equitable title. The relationship of the parties among themselves is less clear cut. The trustee's deed conveying the Gardners' interest to Kenyon is silent regarding the Hancock mortgage. There was no agreement of record between Kenyon and the Gardners for Kenyon to assume the debt. In such situations, the law deems the transferee to have taken the land subject to the prior mortgage. See Harvey v. Knitting Company, 197 N.C. 177, 148 S.E. 45 (1929); Arnold v. Howard, 29 N.C.App. 570, 225 S.E.2d 149 (1976). Since there was no assumption of the mortgage debt incident to the transfer of the land, Kenyon had no personal liability for the debt either as to Independence or as to Gardner. Henry v. Heggie, 163 N.C. 523, 79 S.E. 982 (1913), and Gardner remained personally liable on the note. Keller v. Parrish, 196 N.C. 733, 147 S.E. 9 (1929). Independence could not prevent the transfer of the land securing its note but could, under the terms of the note and the deed of trust, refuse to allow assumption of the debt and could declare the balance due and payable. Crockett v. Savings and Loan Assoc., supra. This they did by their letter of 26 June 1979.

Regardless of who was personally liable on the note or who held equitable title to the land, the law is clear that Independence had the right, upon default, to foreclose on the deed of trust and satisfy the debt from proceeds of the sale of the land. McKinney v. Sutphin, 196 N.C. 318, 145 S.E. 621 (1928). See generally, Hetrick, supra.

III

Although Independence communicated to Kenyon its intent to accelerate the debt, they entered into negotiations instead. The installment due on the Hancock note on 1 July 1979 was not paid and the mortgage, according to its terms, was in default. The negotiations between Kenyon and Independence produced an agreement that was evidenced by the 19 July 1979 letter from Independence to Kenyon. Its terms were essentially that Independence would not foreclose on the deed of trust as long as Kenyon kept the loan payments current. Kenyon also agreed to cure the existing default by payment of a lump sum of overdue principal and interest. The agreement apparently did not increase the principal amount of the debt or the rate of interest. Further, the maturation date of the mortgage was not changed. The agreement, however, did permit prepayment of the note in case of sale or development of the land by Kenyon. Prepayment was not allowed under the Hancock note without consent of the holder. The letter recites the further agreement of the parties that the acceptance of payments by Independence "does not constitute a formal loan assumption by Kenyon" and that Independence's future rights as lienholders were not diminished or altered in the event of a subsequent default.

a.

The relationship of the parties resulting from this agreement is, in our opinion, a key to the resolution of this appeal. The agreement resembles an assumption agreement in the obligations that it imposes upon the parties. However, one of the requisites of an assumption agreement is that the intent of the parties be clear. Beaver v. Ledbetter, supra. It is a general rule of contract law that the intent of the parties, where not clear from the contract, may be inferred from their actions. This general rule applies to transfers of land so that a transferee's intent to assume the mortgage debt may be implied from the actions of the parties. 59 C.J.S. Mortgages, Section 406 d; Osborne, Nelson, Whitman, Real Estate Finance Law Section 5.8 (1979). Though we find no binding precedent, at least one authority has indicated that this consequence may be avoided by specifically providing in the instrument that the agreement is not an assumption. Osborne et al, supra, Section 5.8.

Kenyon argues that the language in their agreement indicates clearly that no assumption was intended and that no personal liability attached to them by virtue of the agreement. This being so, they argue that Independence's subsequent release (in the Bankruptcy Settlement Agreement of 13 May 1980) of Max Gardner's obligation on the note that was secured by the deed of trust had the effect of satisfying the debt, entitling Kenyon to cancellation of the deed of trust thereby uniting legal and equitable title in Kenyon. In support of this argument, Kenyon relies on the well established rule that satisfaction of a debt secured by a deed of trust entitles the holder of the equity of redemption to cancellation of the deed of trust. Walston v. Twiford, 248 N.C. 691, 105 S.E.2d 62 (1958); Dobias v. White, 240 N.C. 680, 83 S.E.2d 785 (1954). See generally, 9 N.C. Index 3d Mortgages, Section 17; Hetrick supra, Section 284. The general rule is that release or forgiveness of a secured debt has the same effect as satisfaction of the debt. 55 Am.Jur.2d Mortgages, Section 462.

b.

BB & T argues that even if the agreement does not constitute a formal assumption, it nevertheless evidences the clear intention of the parties that Kenyon assume the obligation represented by the Hancock note and secured by the Hancock deed of trust. BB & T argues that the intent of the parties is not only evident from the letter, but...