Foreclosure of Deed of Trust Recorded in Book 911, at Page 512, Catawba County Registry, In re
| Citation | 50 N.C.App. 69,272 S.E.2d 893 |
| Decision Date | 16 December 1980 |
| Docket Number | No. 8025SC309,8025SC309 |
| Court | Court of Appeal of North Carolina (US) |
| Parties | In re FORECLOSURE OF DEED OF TRUST RECORDED IN BOOK 911, AT , CATAWBA COUNTY REGISTRY. |
M. Carr Ferguson, Asst. Atty. Gen., Gilbert E. Anderews, Daniel F. Ross, and Donald B. Susswein, Tax Division, I. R. S., Washington, D. C., for appellant United States of America.
E. James Moore, Wilkesboro, for appellee Northwestern Factors, Inc.
The I.R.S. presents the novel question of whether funds generated by the foreclosure and sale of real property pursuant to a power of sale contained in a deed of trust conveying that property retain the characteristics of the underlying property and are thus constructively held by the entirety, or whether the tenancy by the entirety is terminated and the proceeds take on the characteristics of property held by tenants in common. The I.R.S. contends that when real property held by husband and wife as tenants by the entirety is foreclosed and sold pursuant to a power of sale in a deed of trust, the characteristics of the tenancy by the entirety come to an end, and the surplus funds resulting from the sale are held by the husband and wife as tenants in common. Under this theory the I.R.S. contends that through its tax lien against Frank S. Cline, individually, it would be entitled to one-half of the amount remaining of the surplus after payment of the other judgment creditors and lienholders with chronological priority. This would give the I.R.S. a valid lien and place it before both Northwestern Factors, Inc., and Conover Foam and Fiber Corporation in the line for payment of debts secured by liens on the property.
The distinctive properties and incidents of an estate by the entirety are set forth by Justice Stacy in Davis v. Bass, 188 N.C. 200, 124 S.E. 566 (1924). See also : J. Webster, Real Estate Law in North Carolina § 102, § 114-117 (1971). The tenancy by the entirety had its origin in the common law fiction that the husband and wife represented one entity. By virtue of the right of survivorship, which is the most distinguishing feature of this tenancy, the entire estate is vested in both the husband and wife simultaneously. Each spouse is deemed to be seized of the whole. The husband and wife are two natural persons, but they are treated by the law as one person. Upon the death of either spouse, the survivor automatically takes the entire estate. There is a change in the properties of the legal person holding the estate, but there is no alteration in the properties of the estate held.
It is basic law that neither the individual creditors of the husband nor the individual creditors of the wife can reach entirety property by execution upon a judgment procured against either spouse alone. However, joint creditors of both spouses can procure a judgment against both the husband and wife on a joint obligation, and the judgment will become a lien on land held by them as tenants by the entirety. This is why lenders and creditors so often compel husband and wife to execute obligations as co-makers. Martin v. Lewis, 187 N.C. 473, 122 S.E. 180 (1924); see: Bank v. Corbett, 271 N.C. 444, 156 S.E.2d 835 (1967); Edwards v. Arnold, 250 N.C. 500, 109 S.E.2d 205 (1959); J. Webster, Real Estate Law in North Carolina § 115 (1971).
North Carolina has adopted the tenancy by the entirety and all of the incidents and properties appurtenant thereto. The right of survivorship is the single most important characteristic of this manner of holding property. The I.R.S. is asking us in the case sub judice to abolish a significant part of the effectiveness of the right of survivorship as it relates to the tenancy by the entirety. This we are not willing to do.
Although North Carolina recognizes the right of husband and wife to hold real property as tenants by the entirety, it does not in general recognize the tenancy by the entirety in personal property. Wilson v. Ervin, 227 N.C. 396, 399, 42 S.E.2d 468, 470 (1947), and cases cited therein. When husband and wife voluntarily sell and convey real property owned by them as tenants by the entirety, the proceeds of sale are considered personal property. Therefore, the husband and wife are tenants in common with respect to the ownership of the proceeds of the sale. Shores v. Rabon, 251 N.C. 790, 793, 112 S.E.2d 556, 559 (1960), and cases cited therein; Wilson v. Ervin, supra. Generally, proceeds from a voluntary sale of real property held by the entirety are held by the husband and wife as tenants in common.
The I.R.S. bases its argument upon this rule of law. They contend that a foreclosure sale, like that of the instant case, is a voluntary conversion of realty into personalty. Therefore, the proceeds should be held by tenancy in common. This would give them a right to participate in the disposition of the surplus. The I.R.S. contends that this foreclosure sale pursuant to a power of sale is voluntary because "the Clines jointly and voluntarily executed a deed of trust encumbering the property, and the Clines were in no way legally prevented from paying the debt secured by the deed of trust."
The above stated rule upon which the I.R.S. relies applies to voluntary but not involuntary conversions of real property held by the entirety. A different rule prevails in North Carolina when the transfer of property held by the entirety is involuntary. The cases hold that the funds received from the involuntary conversion of the underlying real property constructively retain the characteristics of property held by the entirety.
Highway Commission v. Myers, 270 N.C. 258, 154 S.E.2d 87 (1967), involved an involuntary taking of real property held by the entirety. The North Carolina State Highway Commission, implementing the State's power of eminent domain, condemned a right of way for highway purposes over a portion of the real property owned by Irvin J. Myers and wife, Sarah V. Myers, as tenants by the entirety. Pursuant to this condemnation the Commission deposited with the Clerk of Superior Court $10,455 as compensation for the land taken.
At the time of this condemnation Irvin J. Myers and his wife were separated, but not divorced. A dispute arose between the estranged couple over the proper disbursement of the proceeds from the condemnation. On appeal from an order of the Superior Court the State Supreme Court considered the question of whether Mrs. Myers was entitled to a distribution of any part of the $10,455 deposit. In his opinion in which he found the deposit was held by the entirety, Justice Bobbitt stated:
Upon the filing of the complaint and the declaration of taking and deposit in court the title and the right to immediate possession of the portion of the Myers property within the right of way of said project vested in the Commission. G.S. 136-104. Voluntary action by the owner is not involved. The question for decision is whether such involuntary transfer of title effected by the condemnation proceeding operates to destroy or dissolve the estate by the entirety as if the condemned portion of the Myers property had been sold and conveyed by the voluntary joint acts of the owners thereof. Specifically, is the compensation paid by the Commission for the appropriated property constructively real property, owned by husband and wife as tenants by the entirety, or personal property owned in equal shares by husband and wife?
Unless otherwise provided by their joint and voluntary agreement, and in the absence of an absolute divorce, we are of opinion and so decide that such involuntary transfer of title does not destroy or dissolve the estate by the entirety in respect of the appropriated portion of the Myers land, and that the compensation paid by the Commission therefor has the status of real property owned by husband and wife as tenants by the entirety.
270 N.C. at 262, 154 S.E.2d at 90.
Similarly, in Perry v. Jolly, 259 N.C. 305, 130 S.E.2d 654 (1963), the North Carolina Supreme Court declared that the proceeds from the sale of real property held by husband and wife constructively retained the characteristics of the real property where the wife was incompetent. The court reasoned that the wife's disability made the sale of the property involuntary. Therefore, the resulting proceeds were not held by the couple as tenants in common.
In Perry, the petitioner's wife, Florence Johnson Perry, had previously been adjudged incompetent. Her husband, the petitioner, instituted a special proceeding to have the court authorize the private sale of certain farm land owned by him and his wife as tenants by the entirety. Mrs. Perry's guardian objected to the sale. However, the sale was carried out and confirmed by the Superior Court. After the entry and approval of this confirmatory decree, W. H. Perry as attorney in fact for the petitioner appealed from the sale alleging among other things that the sale had destroyed the tenancy by the entirety. In answer to this issue the Supreme Court through Justice Higgins stated:
(2) The sale does not destroy or separate the interests of the tenants by the entirety if one of the parties is incompetent. The right of survivorship is transferred to the fund. A divorce will convert tenancy by entirety into a tenancy in common. A voluntary sale will work a conversion of the land into personalty to be held as other personalty. Wilson v. Ervin, 227 N.C. 396, 42 S.E.2d 468. However to be voluntary, the sale must be made by both husband and wife. Both must be sui juris. If one is incompetent, a sale cannot be the voluntary act of both. When the court finds it necessary for the good of the parties to require a sale, it is necessary that a good title pass to the purchaser. However, the right of survivorship is transferred to the fund to be held in the manner hereinafter discussed.
259 N.C. at 314, 130 S.E.2d at 661. For cases from other jurisdictions holding that surplus money arising in...
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