Chrysler Credit Corp. v. Burton, C-83-791-WS.

• Citation: 599 F. Supp. 1313
• Decision Date: 17 December 1984
• Docket Number: No. C-83-791-WS.,C-83-791-WS.
• Court: U.S. District Court — Middle District of North Carolina
• Parties: CHRYSLER CREDIT CORPORATION, Plaintiff, v. Graydon Coleman BURTON, Janis Wynne King Burton, NCNB National Bank of North Carolina, and John M. Brubaker, Trustee, Defendants.

599 F. Supp. 1313

CHRYSLER CREDIT CORPORATION, Plaintiff, v. Graydon Coleman BURTON, Janis Wynne King Burton, NCNB National Bank of North Carolina, and John M. Brubaker, Trustee, Defendants.

No. C-83-791-WS.

United States District Court, M.D. North Carolina, Winston-Salem Division.

December 17, 1984.

COPYRIGHT MATERIAL OMITTED

Walter W. Pitt, Jr., and Joseph T. Carruthers, of Bell, Davis & Pitt, P.A., Winston-Salem, N.C., for plaintiff.

Graydon Coleman (Coley) Burton, pro se.

Benjamin F. Davis, Jr., of Smith, Moore, Smith, Schell & Hunter, Greensboro, N.C., and B. Ervin Brown, II of Badgett, Calaway, Phillips, Davis, Stephens, Peed & Brown, Winston-Salem, N.C., for defendants.

MEMORANDUM OPINION AND ORDER

HIRAM H. WARD, Chief Judge.

This matter came before the Court on plaintiff's Motion for Summary Judgment (July 17, 1984) and defendants' Motion for Summary Judgment (July 17, 1984) pursuant to Rule 56 of the Federal Rules of Civil Procedure. The Court will grant the plaintiff's motion as to the conveyance between defendants Graydon Coleman Burton (Coley) and Janis Wynne King Burton (Janis), and deny the motion as to any other issues. The Court will grant defendants NCNB and John M. Brubaker's motion as to the conveyance between NCNB and defendants Coley and Janis Burton. The Court will deny defendants NCNB and Brubaker's motion on their cross-claim against defendants Coley and Janis Burton.

I. FACTS

On June 15, 1979, plaintiff filed a Complaint in Forsyth County Superior Court¹ against several individuals (including defendant Coley Burton) all of whom had signed the same Continuing Guaranty. Under the terms of the Guaranty, defendant Coley Burton and the other individuals were "primary obligors." Plaintiff's Brief In Support of Motion for Summary Judgment, Exhibit 1 (July 26, 1984). The principal debtor, Burton Dodge, Inc. was indebted to plaintiff in the amount of $174,938.22. Plaintiff's Brief, Exhibits 4 & 5. On February 13, 1981, summary judgment was entered in favor of Chrysler on the issue of liability but not damages. Plaintiff's Brief, Exhibit 6. On July 10, 1981, Coley Burton conveyed the real estate in issue here to his fiancee, Janis King. On July 24, 1981, a Consent Judgment was entered in this action against defendant Coley Burton and others for the amount of $75,000 plus cost. Plaintiff's Brief, Exhibit 7. On September 30, 1982, Janis King Burton and husband executed a deed of trust to Brubaker, Trustee for NCNB. This suit was commenced on August 10, 1983.

Prior to July 10, 1981, defendant Coley Burton was the sole owner of two improved tracts of real estate in Surry County which were used as business property. On July 10, 1981, defendant Coley Burton conveyed these two tracts to defendant Janis (then) King. At the time of the conveyance defendants Coley Burton and Janis Burton were engaged to be married. Deposition of Janis Burton at 4 (August 1, 1984). Although five dollars in deed stamps² were placed on the deed defendant Janis Burton gave defendant Coley Burton no money or any tangible item in exchange for the property.³ Deposition of Coley Burton at 4-5 (August 1, 1984); Deposition of Janis Burton at 9-10. At the time of the conveyance defendant Coley Burton retained substantially no assets; the piece of land was his principal asset. Deposition of Coley Burton at 4-5. Subsequently, September 27, 1981, defendants Coley Burton and Janis King were married and presently remain husband and wife.

On September 30, 1982, defendants Coley Burton and Janis Burton executed a Deed of Trust to defendant NCNB and defendant Brubaker (as Trustee) to secure a loan for the amount of $30,000. Memorandum of Law in Support of Defendant's Motion for Summary Judgment at 2; Affidavit of John Brubaker, Exhibit A (July 25, 1984). At the time of defendant NCNB's loan transaction with defendant Coley Burton and Janis Burton, NCNB obtained an Attorney's Certificate of Title which did not reveal any prior judgments or liens in the chain of title in favor of the plaintiff. Affidavit of Brubaker, Exhibit B & E. This obligation was renewed on March 30, 1983, with the same procedures being followed.

II. DISCUSSION

Plaintiff contends that the July 10, 1981, conveyance between defendants Coley Burton and Janis Burton was a fraudulent conveyance under N.C.Gen.Stat. §§ 39-15 to -22. Plaintiff also asserts that the September 30, 1982 Deed of Trust to defendant NCNB is void as a fraudulent conveyance. Defendants NCNB and Brubaker allege that the September 20, 1982 Deed of Trust is valid and not voidable under North Carolina law. These defendants also allege that defendants Coley and Janis Burton are liable for costs and expenses incurred in this action because of provisions in the Deed of Trust. Defendants Coley and Janis Burton assert that the July 10, 1981 conveyance was not a fraudulent conveyance because valuable consideration passed.

This case presents issues of first impression involving the application of North Carolina fraudulent conveyance law.⁴ In a diversity case the Court enforcing state enacted rights must apply the law of North Carolina as declared by its legislature in a statute or by the North Carolina Supreme Court in a decision. Erie Railroad Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938); Guaranty Trust Co. v. York, 326 U.S. 99, 65 S.Ct. 1464, 89 L.Ed. 2079 (1945). If there are no decisions by the highest court of a state then a federal court must apply what it finds to be the state law after giving "proper regard" to relevant rulings of other courts of the state. Commissioner v. Estate of Bosch, 387 U.S. 456, 87 S.Ct. 1776, 18 L.Ed.2d 886 (1967). In the absence of state court authority a federal court must apply the law as it appears the North Carolina Supreme Court would rule.⁵ Erie Railroad v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188; Brendle v. General Tire & Rubber Co., 505 F.2d 243, 245 (4th Cir. 1974). This case, involving as it does real property issues, statutory reconciliation and interpretation, archaic principles and novel factual settings, calls attention to the "mounting mischief inflicted on the federal judicial system" which Justice Frankfurter described as the result of diversity jurisdiction. Lumbermen's Mut. Cas. Co. v. Elbert, 348 U.S. 48, 54, 75 S.Ct. 151, 155, 99 L.Ed. 59, 65 (1954) (concurring opinion).

A. NCNB DEED OF TRUST

This transaction raises issues concerning the interplay of the recordation statutes and fraudulent conveyances statutes. The policies behind these two statutory schemes differ, one promotes the certainty of records, the other prevents fraud. The Court must be mindful to avoid unwarranted disruption of these policies which would undermine the effectiveness of the statutory scheme. If two acts of the legislature are applicable to the same subject, their provisions are to be reconciled if this can be done by fair and reasonable intendment. Highway Commission v. Hemphill, 269 N.C. 535, 153 S.E.2d 22 (1967). However, to the extent that they are necessarily repugnant, the one last enacted shall prevail.⁶ Id.

North Carolina fraudulent conveyance law has as its cornerstone the venerable case of Aman v. Walker, 165 N.C. 224, 81 S.E. 162 (1914). Among the principles established in Aman, the North Carolina Supreme Court stated, "If the conveyance is upon valuable consideration and made with the actual intent to defraud creditors upon the part of grantor alone, not participated in by the grantee and of which intent he had no notice, it is valid." Aman, 165 N.C. at 227, 81 S.E. at 164.⁷ "According to Aman when a conveyance is made by a debtor for valuable consideration, it is fraudulent and may be set aside only when the conveyance was (1) made with the intent to defraud creditors and (2) the grantee either participated in the intent or had notice of it." Edwards v. Northwestern Bank, 39 N.C.App. 261, 269, 250 S.E.2d 651, 659 (1979). Affirmed on other grounds, 53 N.C.App. 492, 281 S.E.2d 86 (1981). NCNB alleges that the above standard renders the June 23, 1983 deed of trust a valid transaction despite the grantor's intent.

North Carolina law, distilled in Aman, protects bona fide purchasers from creditors of the grantor. In order to be protected a grantee must first be a purchaser for value. NCNB loaned the defendants Janis and Coley Burton $30,000 which was secured by a deed of trust on the contested property. In North Carolina a deed of trust to secure a present loan constitutes the beneficiary a purchaser for value. See Fowle v. McLean, 168 N.C. 537, 84 S.E. 852 (1915); Potts v. Blackwell, 56 N.C. 449 (1857). Plaintiff does not contest the existence of consideration or NCNB's purchaser status.

NCNB must also be without notice of any fraud in order to protect its title. Lack of notice is the second element necessary to establish bona fide purchaser status. Either actual or constructive notice of the grantor's fraud is sufficient to deny protected status to a grantee. See Arrington v. Arrington, 114 N.C. 151, 19 S.E. 351 (1894). The plaintiff has not alleged that NCNB had actual notice of fraud on the part of its grantor but confines its argument to constructive notice. The basis of plaintiff's constructive notice argument stems from the facts that could be derived from a search of the title records. Given the alleged basis of the notice in this case the Court will apply the definition of notice under recordation law. Under recordation law constructive notice means recordation of a document required to be recorded. See Dorman v. Goodman, 213 N.C. 406, 196 S.E. 352 (1938); Fleming v. Mann, 23 N.C.App. 418, 209 S.E.2d 366 (1974). "Recordation is the one and only means of giving notice of an instrument affecting title to real estate." Massachusetts Bonding & Insurance Co. v. Knox, 220 N.C. 725, 729, 18 S.E.2d 436, 440 (1942).

NCNB, as is the custom, hired an attorney to search the title on the property when the loan was given...