June 2002
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June 2002 |
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A PUBLICATION OR THE TITLE COMPANY OF NORTH CAROLINA |
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JOHN H.
NOBLITT [1948-2002] As
the announcement of John's passing so warmly stated, John "peacefully
left his brain tumor behind" on June 21, 2002. He had just turned 54.
John established the Chicago Title office in Charlotte after graduating
from Duke in 1970 and Wake Forest University School of Law in 1976. John's
tremendous contribution to Chicago Title's good fortune was also attended
by his service to the title industry. John served as President of the
North Carolina Land Title Association (NCLTA) from 1987-1988 after serving
in lesser positions on the Executive Committee. Subsequently, John served
as NCLTA General Counsel. John retired a while ago with Stewart Title
after courageously trying to continue his work. John was a bright,
accomplished, interesting, and witty man and professional. He was an
active member of the Myers Park United Methodist Church and was very much
involved in his son's Indian Guides activities, serving as Big Soaring
Dragon. John's
beautiful service on June 25, 2002 recalled his wonderful life. John
is survived by his many friends and family, including his wife Heloise and
young son Ian. John will be missed and remembered fondly. Our thoughts are
with his family in this time of sadness. FTC ACTIVITIES – JUNE 24, 2002 REPORT
OF THE SPECIAL COMMITTEE [N.C.
STATE BAR] ON REAL ESTATE CLOSINGS This
report pertains to residential real estate closings and a full day
evidentiary hearing on June 7, 2002. The Special
Committee recommends that the Council adopt (1 ) a new ethics opinion and
(2) a new advisory opinion on the authorized practice of law. Quoting
from the report: "The
effect of the adoption of the proposed new ethics opinion would be
to do the following:
In
considering the "physical presence requirement" that the
Agencies have challenged, the Special Committee concluded that the State
Bar should not micro-manage the residential real estate practice to the
extent that the State Bar instructs lawyers about when and how to
communicate with clients. This is particularly so in view of technological
improvements that make it ever-easier to communicate with clients and to
handle transactions remotely and electronically. Antitrust counsel,
Everett Bowman of Robinson, Bradshaw & Hinson, P.A., will address
separately the antitrust considerations concerning the recommendation that
this ethics opinion be adopted. We
recommend that the Council adopt, in addition to the new ethics
opinion, the proposed new authorized practice opinion. ..the effect
of which would be to do the following:
The
Special Committee's reasoning is based in large part on the North Carolina
statutory provisions that appear to contemplate that a lay "closing
agent" or "settlement agent" may conduct these oversight
and disbursement activities in lieu of a lawyer. Again, Mr. Bowman will
address antitrust considerations separately. (Footnotes omitted.)" Comment
supporting the residential attorney is being prepared by the NCLTA. FEDERAL
TAX LlENS – AN UPDATE ON
ENTIRETY PROPERTY, PARTNERSHIP PROPERTY AND PURCHASE MONEY DEED OF TRUST
ASPECTS 1.
General comments. In an
April 2002 newsletter, we set forth our comments on U.S. v. Craft, 535
U.S. _____ (U.S. Supreme Court 2002). The case, decided on April 18,
2002, was neither expressly retroactive nor expressly prospective. Unless
the court expressly says that the opinion applies only to federal tax
liens docketed after the decision – and it did not – we must assume
that the court is saying that this is what the law has always been and
real property attorneys and lower courts, as well as Justice Thomas and
the other dissenters, have been under a terrible misunderstanding of what
the law has always been. In other words, the case applies to a federal tax
lien docketed against one of two spouses owning land as tenants by the
entirety even before April 18, 2002; that is, the case has retroactive
application. That was the implication of our April 2002 treatment of the
case. Let us know if you need a copy of that newsletter, since we do not
want to restate its content here. (We did state that we do not expect
people to "look behind" prior policies tacked on to.) The
above notwithstanding, we have been asked about, for example, a situation
where it comes to the attention of the approved attorney that, prior to
April 18, 2002, a federal tax lien has been filed against one spouse and
both spouses own property as tenants by the entirety and a deed of trust
recorded before the federal tax lien is docketed has been properly
foreclosed except that no federal statutory notice has been given to the
I.R.S. pursuant to 26 U.S.C. §7425, as discussed
in our December, 2000 newsletter, and the foreclosure purchaser now wants
to convey or mortgage the property. The practical, if not legal, answer
has to be that we need to know how much is the federal tax lien and was
there value, or equity, in the property above the amount of the foreclosed
deed of trust? If the deed of trust cannot be accorded the benefit of the
"purchase money rule" discussed below, it may be that the I.R.S.
will issue a release if the I.R.S. determines that the I.R.S.'s position
has no value. 26 U.S.C. §6325. (Various releases and certificates of
non-attachment are discussed in Urban and Whitney, North Carolina Real
Estate §21-48.) 2.
Purchase money deed of trust v. prior federal tax lien. With
respect to a purchase money deed of trust, see our Issue 2, Spring 1998
article and Urban and Whitney, North Carolina Real Estate §21-72
(generally) and §21-46 (federal tax liens). Generally, if the deed to the
buyer(s) and the deed of trust to a trustee for either the seller(s) or a
third party lender are executed, delivered and recorded approximately
simultaneously, the deed of trust will have priority over a judgment
docketed against the buyer(s) before acquisition of title if the proceeds
are used to pay the purchase price and closing costs. An eleven day gap
between recording the deed and deed of trust prevented the application of
the rule. Also, to the extent the deed of trust secured construction loan
advances, the rule did not apply. The rule has been held to apply to a
federal tax lien. The rule applies to a federal tax lien on the basis that
the buyer(s) had no interest for the federal tax lien to attach to prior
to the deed of trust attaching. Whether the "purchase money
rule" will be the next thing that the I.R.S. attacks is interesting
to contemplate. However, we believe that the purchase money rule will not
go the way of the tenancy by the entirety rule and so, we will
insure the priority of a purchase money deed of trust against a prior
federal tax lien docketed against the buyer(s) in accordance with the
purchase money rule. However, if you discover such a tax lien, you should
report the tax lien so that we can (1) make sure that the purchase money
rule applies and (2) insert the lien in Schedule B-11 of the loan
policy as a subordinate lien and insert the lien in Schedule B of the
owner's policy. 3.
Partnerships and Craft. A
federal tax lien for the individual tax liability of A (who is also
a partner in ABC Partnership) does not attach to title to real property
vested in the partnership. The property rights of a partner are (1 ) his
right in specific partnership property; (2) his interest in the
partnership and (3) his right to participate in management. G.S. 59-54.
G.S. 59-55 sets out the nature of a partner's right in specific
partnership property. A partner is "co-owner with his partners of
specific partnership property holding as a tenant in partnership."
G.S. 59-55(a). The incidents of this tenancy are outlined in G.S.
59-55(b). Generally, the partner cannot possess the property for other
than partnership purposes. The right is not assignable except in
connection with assignment of rights of all the partners in the same
property. A partner's right in specific partnership property is not
subject to attachment or execution. G.S. 59-55(b)(3). A partner's interest
in the partnership is his share of the profits and surplus, which is
personal property. G.S. 59-56. This is true even though a partnership
asset is real property. Bright I,: Williams, 245 N.C. 648,
97 S.E.2d 247 (1957). A partner's interest is subject to a charging order
under G.S. 59-58. Both the majority and the dissent in U.S. v. Craft recognize
that what all of these sections of the Uniform Partnership Act mean is
that a federal tax lien filed against an individual partner for his
individual tax liability does not constitute a lien on partnership
property. J. Thomas, dissenting opinion, at p. 6, n. 4 and J. O'Connor,
majority opinion, at p.p. 11-12. 4.
Concluding remarks. Of
course, none of this analysis, pertaining to entirety property in
particular, would be necessary if the majority had not made such a mess of
the law in this area. The majority relied upon Drye v. U.S., 528
U.S. 49 (1999), discussed in Estates -Renunciation, Disclaimer and
Federal Tax Liens in View of Drye, Jr., set out in our March, 2001
newsletter. That case disregarded a state law renunciation by the taxpayer
against whom the lien was filed. J. Thomas pointed out that Drye involved
an actual property interest to which the lien could attach, thereby
distinguishing Craft. Dissenting opinion, p. 5. In the
dissenting opinion, J. Thomas makes it clear that there are two concepts
subject to a federal tax lien filed against one of the spouses under 26
U.S.C. §6321: "property and rights to property, whether real or
personal, belonging to such person." J. Thomas states that the
property did not belong to the taxpayer, since it was entirety
property. J. Thomas shows
persuasively that the "rights to property" which the husband
owned, even if subject to a lien, should not result in the lien being
extended to the title to the entirety property as the majority ruled. He
notes that the majority does not suggest that the lien attached to any of
the husband's actual rights to property, such as the right of survivorship
(the taxpayer-husband predeceased the wife!), the right to exclude from
possession persons other than the wife and the right to enjoy rents and
profits with the wife. Dissenting opinion, p.p. 5-6. The majority talks
about "a bundle of sticks," illustrating how unfortunate it was
that the respondent was not sufficiently up on the laws of sticks instead
of the law of real property. Is it not a law
school requirement for Supreme Court justices to take and pass Real
Property 1? BANKRUPTCY--FAILURE TO
PROPERLY EXECUTE AND RECORDAND 11 U.S.C. §544 AVOIDANCE PROBLEMS The
case of In Re Kline, 242 B.R. 306 (Bankr. W.D.N.C. 1999), is to be
noted for several principles. In the case, the following occurred: (1)
5-15-95: debtors purchased land in Cleveland County and gave a deed of
trust securing BB&T recorded in that county; (2) 8-25-97: debtors gave
First Plus a second deed of trust encumbering the land; (3) 9-9-97: First
Plus deed of trust is recorded in Cleveland County (First Plus knew it was
second and subordinate to BB&T); (4) 4-23-98: Debtors gave a deed of
trust to MIC, which was inadvertently recorded in Gaston County but was
not recorded in Cleveland County, the secured proceeds being used to
payoff the 88& T loan which resulted in BB&T canceling its deed of
trust; (5) subsequently, MIC assigned its interest to Source One and
Source One assigned to Litton; (6) 12-16-98: the debtors filed a Chapter 7
petition; (7) 12-17-98: trustee in bankruptcy was appointed; and (8)
6-12-99: trustee filed adversary proceeding. Under 11 U.S.C. §544, known as the "strong arm statute," the trustee in bankruptcy has avoidance powers and has the status of a bona fide purchaser who has perfected a transfer at the time of the commencement of the bankruptcy case. Under 11 U.S.C. §544, G.S. 47-20 and G.S. 47-20.1, the trustee's interest as a bona fide purchaser {hypothetical, to be sure) is superior to the MIC deed of trust recorded in the wrong county. 11 U.S.C. §550{a) provides when a voidable transfer under 11 U.S.C. §544 can be voided against MIC and successors. The transfer to MIC need not be properly recorded to be a "transfer" under 11 U.S.C. §101{54) that is avoidable under 11 U.S.C. §544. The
avoided transfer was automatically preserved for the trustee under 11 U.S.C.
§551. Even
though the trustee could avoid the MIC deed of trust, in preserving it for
the trustee, the trustee was allowed to maintain the fact that the MIC
deed of trust was equitably subrogated to the priority position of the
BB&T deed of trust as against First Plus. First Plus was not a bona
fide purchaser when it made its second deed of trust (First Plus knew of
its second lien status) and First Plus did not change its position in
reliance upon the fact that MIC recorded in the wrong county. In fact, if
the debtors had not filed bankruptcy, as between First Plus and MIC, MIC
could have still recorded its deed of trust in Cleveland County and sought
equitable subrogation to BB&T's first priority deed of trust. Now the
trustee was entitled to first priority. The court cited North Carolina
subrogation cases. In Re White, 183 B.R. 713 (Bankr. M.D.N.C.
1995); Wallace v. Benner, 200 N.C. 124, 156 S.E. 795 (1931 ); Peek
v. Wachovia Bank & Trust Co., 242 N.C. 1, 86 S.E.2d
745 (1955). In
Re Price, 97 B.R. 264 (Bankr.
E.D.N.C. 1989), is a similar case. The following occurred: (1) 1-27-87:
the debtors borrowed $69,000 from Southern which was secured by a properly
recorded deed of trust; (2) subsequently, the debtors borrowed
approximately $39,000 from Planters which was secured by a properly
recorded deed of trust (Planters understood its second lien position); (3)
2-23- 88: the Southern deed of trust was accidentally cancelled; (4) 9-15-
88: the debtors filed a Chapter 7 petition. 11
U.S.C. §544(a)(3) allowed the trustee to avoid Southern's lien. However,
Planters did not move into first position, since Southern's lien was
preserved for the estate under 11 U.S.C. §551. As between Southern and
Planters, Southern could rescind its accidental cancellation. Monteith
v. Welch, 244 N.C. 415, 94 S.E.2d 345 (1956). Planters was not
a bona fide purchaser with respect to Southern's lien, since Planters knew
of Southern's lien when Planters made its loan and Planters did not change
its position in reliance on the erroneous cancellation. These
cases and the statutes they discuss are important for other reasons as
well. To be properly recorded, a deed or deed of trust must be validly
executed, acknowledged, recorded and indexed. G.S. 47-18; G.S. 47-20; G.S.
47-20.1. A delay in recording and indexing or the recording and indexing
of a document which bears a faulty execution or acknowledgment can also
cause difficulty if the grantor of the instrument then files bankruptcy.
This is because of the trustee's status as a judicial lien creditor under
11 U.S.C. §544(a)(1) and a bona fide purchaser under 11 U.S.C. §544(a)(3).
If after that status is attained, an executed and acknowledged document
that has not been recorded is subsequently recorded and indexed
voidability problems under 11 U.S.C. §544 can exist. If a document that
has been recorded and indexed prior to the bankruptcy but was invalidly
executed or acknowledged a similar problem can arise. Correction and
rerecording subsequent to bankruptcy would not matter if the original
recording was ineffective. OPTIONS TO PURCHASE -- TIMELY EXERCISE
AS BETWEEN THE PARTIES AND AS
AGAINST THIRD PARTIES Sharpe
v. Sharpe, _____ N.C. App.
_____, 563 S.E.2d 285 (2002), shows how a will can grant an option to
purchase land. The clause in the will gave the holder of the option 6
months from the date of the qualification of the executor to exercise the
option. The
option contained no requirement that the purchase price be tendered during
that time period. Within the option period, the holder of the option sent
the executor a letter "reaffirming my intention of exercising my
option to purchase the land as described in Edith Sharpe's will."
That was enough to be a valid exercise under a line of cases, including Kidd
v. Early, 289 N.C. 343, 222 S.E.2d 392 (1976). In Trogden
v. Williams, 144 N.C. 192, 56 S.E.2d 865 (1907), an option dated
January 16, 1905, stated that the option period was 90 days. The option
stated that if the parties elected to buy within the period, they then had
to pay $10,000: $5,000 in cash and the rest within one year of the first
payment. The option was recorded May 4, 1905. On June 28, 1905, another
party was given a contract to purchase. The court stated that, since no
deed appeared of record, that party was entitled to assume that the option
had ended. One commentator has stated that with respect to "recent
options," prudence would seem to dictate that inquiry be made as to
whether the option lapsed or had been exercised (apparently by off-record
notice) or was in dispute, even though, within the option period, there
appeared of record no deed, extension of the option or notice of lis
pendens. M. Happer, Real Estate Contracts and Options, appearing in Real
Property Practice-1979, lll-1 et seq., at lll-11, lll-12 (N.C. Bar Assoc.
1979). An extension of a lease is not per se an automatic extension of the option to purchase contained therein. The intention of the parties controls. Davis v. McRee, 299 N.C. 498, 263 S.E.2d 604 (1980). RULE AGAINST
PERPETUITIES AND CONTRACTS Where
a seller and buyer entered into an unrecorded contract to sell real
property and the provisions of the contract provided that if the buyer
resold lots an availability fee would be paid to the seller and prior to
sale by the buyer the buyer would insert such a provision into recorded
restrictions further providing for a lien for any unpaid fees, the Supreme
Court held that the contractual provision did not violate the common law
rule against perpetuities. Title to the land was not affected. The
contract did not involve a non-vested future interest. See Rich, Rich &
Nance v. Carolina Construction Corporation,_____ N.C. _____558
S.E.2d 77 (2002), reversing and remanding 144 N.C. App 303, 548 S.E.2d 541
(2001). The Court of Appeals case is discussed in A. Dexter, The Rule
Against Perpetuities in Commercial Transactions, 23 Real Property Vol.
1 (NCBA Real Property Sec. February 2002).
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