MCB Ltd. v. McGowan

• Decision Date: 18 August 1987
• Docket Number: No. 863DC1307,863DC1307
• Citation: 86 N.C.App. 607,359 S.E.2d 50
• Court: North Carolina Court of Appeals
• Parties: MCB LIMITED, A North Carolina Partnership, v. Charles Hugh McGOWAN, Jr., Janice M. Barbre and William I. Wooten, Jr., Trustee.

Page 50

359 S.E.2d 50

86 N.C.App. 607

MCB LIMITED, A North Carolina Partnership, v. Charles Hugh McGOWAN, Jr., Janice M. Barbre and William I Wooten, Jr., Trustee.

No. 863DC1307.

Court of Appeals of North Carolina.

Aug. 18, 1987.

Narron, Holdford, Babb, Harrison & Rhodes, P.A. by Walter L. Hinson, Wilson, for plaintiff-appellant.

Everett, Everett, Warren & Harper by C.W. Everett, Sr. and Edward J. Harper, II, Greenville, for defendants-appellees McGowan and Barbre.

Williamson, Herrin, Barnhill & Savage by Mickey A. Herrin, Greenville, for defendant-appellee Wooten.

ORR, Judge.

Plaintiff, a limited partnership, contracted to purchase real property from defendants for the purpose of commercial development. To aid in financing the development, plaintiff's sales contract included a provision requiring defendants to accept a purchase money deed of trust. In addition, defendants were to execute a deed or deeds of subordination to construction and/or permanent financing.

On or about 1 August 1983 defendants tendered to plaintiff, in pertinent part, a deed for the property and plaintiff tendered a deed of trust securing the balance of the purchase price. The deed of trust also contained a provision requiring defendants to subordinate their lien to future construction and permanent financing loans arranged by plaintiff during development of the property.

Subsequently plaintiff obtained a construction loan for repair and renovation of the property, to which defendants subordinated their lien position. However, when plaintiff asked defendants to subordinate a second time, to a loan permanently financing the development of the property, defendants refused.

Plaintiff sued for a declaratory judgment, requesting the trial court to find valid the subordination clauses in the sales contract and deed of trust, to require defendants to issue multiple deeds of subordination in conformity with the clauses, and to award plaintiff a minimum of $25,000 in damages. Defendants filed a motion to dismiss for failure to state a claim for relief. The trial court granted defendants' motion and ordered plaintiff's complaint dismissed. From this order plaintiff appeals.

A motion to dismiss pursuant to Rule 12(b)(6) tests the sufficiency of the complaint. Sutton v. Duke, 277 N.C. 94, 176 S.E.2d 161 (1970); Azzolino v. Dingfelder, 71 N.C.App. 289, 322 S.E.2d 567 (1984). A complaint will be found insufficient "if it is clearly without merit; such lack of merit may consist of an absence of law to support a claim of the sort made, absence of fact sufficient to make a good claim, or the disclosure of some fact which will necessarily defeat the claim." Forbis v. Honeycutt, 301 N.C. 699, 701, 273 S.E.2d 240, 241 (1981); Collins v. Edwards, 54 N.C.App. 180, 282 S.E.2d 559 (1981).

After reviewing plaintiff's complaint, we find the subordination provisions in the contract and deed of trust were void for indefiniteness. Therefore, plaintiff's complaint failed to state a legally recognizable claim for relief and was properly dismissed.

In North Carolina "[o]ne of the essential elements of every contract is mutual[ity] of agreement. There must be neither doubt nor difference between the parties. They must assent to the same thing in the same sense, and their minds must meet as to all the terms. If any portion of the proposed terms is not settled, or no mode agreed on by which they may be settled, there is no agreement." Croom v. Lumber Co., 182 N.C. 217, 220, 108 S.E. 735, 737 (1921) (emphasis added). See Boyce v. McMahan, 285 N.C. 730, 208 S.E.2d 692 (1974); Gregory v. Perdue, Inc., 47 N.C. App. 655, 267 S.E.2d 584 (1980); Gray v. Hager, 69 N.C.App. 331, 317 S.E.2d 59 (1984). A contract, and by implication a provision, "leaving material portions open for future agreement is nugatory and void for indefiniteness." Boyce v. McMahan, 285 N.C. at 734, 208 S.E.2d at 695. See Kidd v. Early, 289 N.C. 343, 222 S.E.2d 392 (1976). Consequently any contract provision, including a subordinating provision, failing to specify either directly or by implication a material term is invalid as a matter of law.

The specificity of terms in a subordination clause is a question of first impression in North Carolina. In addressing this question we will first review the circumstances in which subordination provisions are used and the purpose behind this use. We will then look to other jurisdictions for guidance in determining what terms are material in such clauses. Finally we will apply the contract law discussed above to the facts in the present case.

A subordination clause is one in which a seller of land, after retaining a security interest in the property sold, permits his interest to become secondary in priority to an encumberance placed upon the property by the purchaser. See Roskamp Manley Assoc. v. Davin Dev. & Inv., 184 Cal.App.3d 513, 229 Cal.Rptr. 186 (1986); Annot. "Specific Performance--Definiteness," 26 A.L.R.3d 855 (1969); Subordination Agreements, Dee Martin Calligar, 70 Yale L.J. 376 (1961).

In the present case and under the typical arrangement, the land is sold subject to a purchase money mortgage and the purchaser is authorized to subject the land to a subsequent mortgage to borrow funds for construction or development. Id. This clause is designed to allow a purchaser to develop the land with a relatively small initial investment in the purchase of the property. Inherent in this financing mechanism is the seller's risk of losing both his land and the balance due on the purchase price if the development is not successful. Since the land sold stands as security for not only the initial purchase price but also the costs of development, the foreclosure of the first deed of trust could result in the seller's inability to recover either the land or the money due him. Id.

As a result of the unique risks inherent in subordination clauses, other jurisdictions require these clauses to "contain terms that will define and minimize the risk that the subordinating liens will impair or destroy the seller's security." Handy v. Gordon, 65 Cal.2d 578, 581, 55 Cal.Rptr. 769, 770-71, 422 P.2d 329, 330-31 (1967); Spangler v. Memel, 7 Cal.3d 603, 102 Cal.Rptr. 807, 498 P.2d 1055 (1972).

Only one jurisdiction, California, has dealt extensively with the problem of enforcement of subordination provisions. In Gould v. Callan, 127 Cal.App.2d 1, 273 P.2d 93 (1954), California first identified the material terms of such a clause, holding that the subordination provisions must draw, at a minimum, the outside limits of the seller's exposure by stipulating the amount of the new proposed loan by the buyer, the maximum rate of interest, and the term and method of the loan's repayment. The Gould Court found that failure to include these terms rendered a clause incomplete and too uncertain for enforcement. Gould v. Callan, 127 Cal.App.2d 1, 273 P.2d 93. Accord, Roskamp Manley Assoc. v. Davin Dev. & Inv., 184 Cal.App.3d 513, 229 Cal.Rptr. 186 (1986); Cummins v. Gates, 235 Cal.App.2d 532, 45 Cal.Rptr. 417 (1965); Magna Development Co. v. Reed, 228 Cal.App.2d 230, 39 Cal.Rptr. 284 (1964); Roven v. Miller, 168 Cal.App.2d 391, 335 P.2d 1035 (1959).

In later cases the California Courts recognized, as does this Court, that the degree of particularity discussed above is not always attainable where details of future loans are not known prior to the sale of the property. In Stockwell v. Lindeman, 229 Cal.App.2d 750, 40 Cal.Rptr. 555 (1964) the California Court of Appeals held that a subordination clause must state the matters which most directly affect the security of the seller's purchase money mortgage--the maximum amount of the proposed loan and the maximum rate of interest permitted on the future obligation. Remaining details in the provision may be determined by an outside standard, such as a third party institutional lender, custom and usage in the area for such loans, or negotiations between the lender and the buyer. Id. Accord, Yackey v. Pacifica Development Co., 99 Cal.App.3d 776, 160 Cal.Rptr. 430 (1979); Eldridge v. Burns, 76 Cal.App.3d 396, 142 Cal. Rptr. 845 (1978); Woodworth v. Redwood Empire Sav. & Loan Assn., 22 Cal.App.3d 347, 99 Cal.Rptr. 373 (1971); Magna Development Co. v. Reed, 228 Cal.App.2d 230, 39 Cal.Rptr. 284; Gould v. Callan, 127 Cal.App.2d 1, 273 P.2d 93. However, the Stockwell Court stressed that a subordination provision will be found uncertain and unenforceable, if any details are left to the future agreement of the buyer and the seller. Stockwell v. Lindeman, 229 Cal.App.2d 750, 40 Cal.Rptr. 555. Prior to and since Stockwell, the California Courts have consistently held that when a material term is reserved for future agreement by parties to a contract no legal obligation arises until the parties reach such agreement, since they may be unable to reach a consensus as to that term on a later date. Id. Accord, Roskamp Manley Assoc. v. Davin Dev. & Inv., 184 Cal.App.3d 513, 229 Cal.Rptr. 186; Yackey v. Pacifica Development Co., 99 Cal.App.3d 776, 160 Cal.Rptr. 430; Lawrence v. Shutt, 269 Cal.App.2d 749, 75 Cal.Rptr. 533 (1969); White Point Co. v. Herrington, 268 Cal.App.2d 458, 73 Cal.Rptr. 885 (1968); Magna Development Co. v. Reed, 228 Cal.App.2d 230, 39 Cal.Rptr. 284; Gould v. Callan, 127 Cal.App.2d 1, 273 P.2d 93.

The California Courts' treatment of subordination provisions left to the future...