Real Property Foreclosure Procedures
(PUBLISHED AUGUST 2008 FOR THE NORTH CAROLINA LAND TITLE ASSOCIATION BY LAWRENCE S. MAITIN.)
A. Title Examination
A title search and examination should be performed at the initial stages of the foreclosure action. The title examination is to determine if the deed of trust is a valid lien against the property, to identify what parties are required to receive notice of the foreclosure proceedings, and to ensure free and clear title upon completion of the foreclosure process.
If the deed of trust is defective, there may be no right to foreclose. The deed of trust must be properly executed and notarized; it must be recorded at the register of deeds of the county or counties where the property is located; and it must contain a complete legal description of the property it is securing. The deed of trust should be reviewed for a power of sale clause, and for notice and acceleration requirements. While the deed of trust may not be defective on its face, it should be determined if the borrower had a proper ownership interest to convey a deed of trust. If a chain of title reveals a defect in the conveyance of title to the borrower, this could render the deed of trust defective as well.
A majority of foreclosures result in the lender taking title to the property. As a result, a lender needs to know if there are other encumbrances on the property that would hinder their ability to re-sell the property upon becoming the owner. A title examination will reveal prior liens, judgments, unpaid taxes, federal tax liens and other items that may adversely affect title. Superior liens will survive the foreclosure and remain an encumbrance on the property. Subordinate liens are generally extinguished in a foreclosure action. However, ad valorem taxes and special assessments will not be extinguished, even if they appear subsequent in time to the foreclosing deed of trust. The title searcher needs to be sure of how to locate all special assessments in the county where the property is located, as it will differ from county to county. If the lender was suppose to have been in a superior lien position upon the closing of the subject loan, but a title examination reveals otherwise, an effort should be made to clear title prior to the foreclosure sale.
B. Appointment of Substitute Trustee.
The trustee named in the deed of trust carries out the foreclosure action. While the original trustee named in the deed of trust may institute the foreclosure, the lender will generally appoint an individual, firm, or company that is experienced in foreclosure matters to be substituted in place of the original trustee. This is accomplished by the execution of a written document properly recorded in the county where the real property collateral is located. N.C.G.S. § 45-10 and 11. A trustee may be substituted in the place of another as often as justifiable by the holder of the indebtedness secured by the deed of trust. N.C.G.S. § 45-17. The substitute trustee must be appointed prior to filing and serving the Notice of Hearing to commence the foreclosure action. A failure to record the Appointment of Substitute Trustee before the Notice of Hearing would create a defective foreclosure, because the foreclosure action was initiated without authority to do so.
If the lender is a corporation, the appropriate officer must execute the Appointment of Substitute Trustee. This instrument must be executed by its chairman, president, chief financial officer, vice president, assistant vice president, treasurer, or chief financial officer to be valid. N.C.G.S. § 47-18.3(a). If the lender insists on another officer or agent of the company executing the substitution of trustee instruments, then the lender must attach a corporate resolution to the instrument that authorizes the individual to execute it. N.C.G.S. § 45-18.3(e). If the lender is a Limited Liability Company, a Manager must execute the Appointment of Substitute Trustee.
C. Notice of Hearing.
Once a substitution of trustee is recorded with the Register of Deeds, the substitute trustee may initiate the foreclosure action by filing a Notice of Hearing with the Clerk of Superior Court of the county where the land being foreclosed on is situated. N.C.G.S. § 45-21.16(a). Prior to filing and serving the Notice of Hearing, the trustee will need to confirm that a statement of the debt, as described directly below in paragraph “6”, has been mailed to the borrower. N.C.G.S. § 45-21.16(c)(5a). The Notice of Hearing must specify the time and place for hearing, and comply with the requirements of N.C.G.S. § 45-21.16(c), which includes:
- Description of the secured real estate, the date, original amount, original holder, and book and page of the deed of trust;
- Name and address of the holder of the deed of trust;
- Nature of the default;
- Acceleration of the debt;
- Debtor’s right to pay indebtedness or cure the default;
- The lender has confirmed in writing, that within 30 days of the date of the notice, the borrower was mailed a detailed written statement at the debtor’s last known address, of the amount of principal, interest, and any other fees, expenses and disbursements the lender is claiming to be due as of the day of the statement, together with a daily interest charge based on the contract rate;
- Within two years preceding the date of the written statement, that any requests for information made by the borrower to the servicer pursuant to N.C.G.S. §45-93 have been complied with;
- Debtor’s right to appear and contest the foreclosure, and that if the debtor is not contesting the default, the debtor does not have to appear and that his rights to pay the debt, prevent the sale, or attend the actual sale will not be affected;
- The substitute trustee is a neutral party and may not advocate for the secured creditor or for the debtor;
- Debtor has a right to apply to a superior court judge to enjoin the sale;
- To authorize the foreclosure, the clerk must find the existence of a valid debt of the holder, default, right to foreclose under the instrument, and proper notice;
- If the debtor fails to appear at the hearing, the trustee will ask the clerk for an order to sell the property;
- Debtor has the right to seek the advice of an attorney and that free legal service may be available by contacting Legal Aid of NC or other organizations;
- Purchaser’s right to evict after foreclosure;
- Name, address, and telephone number of trustee or mortgagee;
- Debtor should keep the trustee or mortgagee notified in writing of his address so that he can be mailed notice of the sale, postponements, or resales; and
- The hearing may be held on a later date, and there will be notification of any such change.
Several of the above items to be included in the Notice of Hearing are new items that became effective April 1, 2008, so there is likelihood that not all trustees have updated their forms leaving room for some foreclosure to be challenged causing possible title issues. It is should be noted that it is not required that the Notice of Hearing itself contain the names of the parties entitled to notice. McArdle Corp. v. Patterson, 115 N.C. App. 528 (1994), aff’d 340 N.C. App. 356, (1995).
D. Service Of Process
1. Parties Entitled To Receive Notice Of Hearing. The Notice of Hearing must be served upon all parties designated by N.C.G.S. §45-21.16(b), which are:
- Any person to whom the deed of trust directs notice to be sent in case of default;
- Any person obligated to repay the indebtedness against whom the holder intends to assert liability; and
- Every record owner of the real estate whose interest is of record in the county where the real property is located, which includes both present and future interests.
If a borrower were obligated by the promissory note, but not a party to the deed of trust, the foreclosure would not necessarily be defective if the trustee failed to notify this borrower. However, N.C.G.S. §45-21.16(b)(2) provides that any person not notified shall not be liable for any deficiency remaining after the sale. Therefore, the trustee should serve a Notice of Hearing on all borrowers to preserve the right of the lender to pursue a deficiency if necessary.
2. Methods of Service
a. Personal Service. The trustee must serve all parties entitled to notice of the hearing in any manner provided by the North Carolina Rules of Civil Procedure (N.C.R.C.P. Rule 4j) for service of summons. N.C.G.S. §45-21.16(a). This includes service by sheriff, and certified or registered mail, return receipt requested. Id. The Notice of Hearing must be served not less than 10 days prior to the hearing date. The trustee must obtain proof of service of the Notice of Hearing, which may be a certification from the sheriff that service upon the person was made, or a return receipt. Rule 4(j2). If a return receipt is used as proof of service, it must be supported by an affidavit stating as set forth in N.C.G.S. § 1-75.10:
i. That a copy of the summons and complaint was deposited in the post office for mailing by registered or certified mail, return receipt requested;
ii. That it was in fact received as evidenced by the attached registry receipt or other evidence satisfactory to the court of delivery to the addressee; and
iii. That the genuine receipt or other evidence of delivery is attached.
b. Service by Posting. When service of process cannot be obtained personally on a party in a foreclosure action, it is not as problematic as in other forms of civil actions. This is because service of the Notice of Hearing may also be accomplished by posting the notice in a conspicuous place and manner upon the property for not less than 20 days before the date of the hearing. N.C.G.S. § 45-21.16(a). Posting of the Notice of Hearing is a valid method of service only in those instances that publication would be authorized, and a reasonable and due diligent effort was made to serve the party personally. Id. This provision allowing the Notice of Hearing to be posted is very useful when parties are avoiding service of process, or are difficult to locate. It saves the time and expense of having to publish notice of the foreclosure hearing to effect service of process.
The sheriff must post the Notice of Hearing, and an affidavit must be filed by the trustee with the Clerk of Court showing the circumstances warranting the use of service by posting. Id. The trustee must also make an effort to serve the Notice of Hearing by certified or registered mail as well, to ensure that a diligent effort was made to serve the parties personally. Notice must be mailed to the party’s last known address along with attempts at personal service for service by posting to be sufficient. Federal Land Bank v. Lackey, 94 NC App 553 (1989), aff’d 326 N.C. 478 (1990).
c. Service by Publication. There could be circumstances where the Notice of Hearing on foreclosure of a deed of trust needs to be published to effect service of process, and avoid the possibility of the foreclosure being attacked later for improper service. One scenario that comes to mind is that the real property to be foreclosed consists solely of land without a place for the sheriff to post the notice. In such circumstances, service of the notice of hearing may have be made by publication pursuant to Rule 4(j1) of the N.C.R.C.P., which requires:
- Publishing a notice of service of process once a week for three successive weeks in a newspaper that is qualified for legal advertising in accordance with N.C.G.S. § 1-597 and N.C.G.S. § 1-598 and circulated in the area where the party to be served is believed to be located.
- If there is no reliable information concerning the location of the party, then in a newspaper circulated in the county where the action is pending.
- Upon completion of such service there shall be filed with the court an affidavit showing the publication, the circumstances warranting the use of service by publication, and information, if any, regarding the location of the party served.
- The notice of service of process by publication shall designate the court in which the action has been commenced and the title of the action; be directed to the party sought to be served; state that a pleading seeking relief against the person to be served has been filed; state the nature of the relief being sought; and state that the party has a right to appear before the clerk of court, but that a failure to appear will not affect the party’s rights to pay the indebtedness and prevent the proposed sale.
d. Service on Heirs. If the Substitute Trustee is not certain that all the heirs of a deceased owner have been ascertained, or is not completely confident of the location of the heirs, it is best to appoint a Guardian ad Litem to represent the interests of the known and unknown heirs. There is far less of chance that the foreclosure can be successfully attacked for insufficient service of process if this step is taken. While service by publication is a viable alternative method when the location of the heirs are not certain, it is simply more effective and easier for the trustee to appoint and serve the Guardian ad Litem.
e. Service on Minors. If it is found that an heir of the property being foreclosed is a minor under the legal age of 18, personal service of process must be attempted on the legal guardian of the minor. A Guardian ad Litem must be appointed to represent the interest of the minor if the minor’s legal guardian cannot be ascertained.
A foreclosure hearing is held before the Clerk of Superior Court in the county where the land being foreclosed is located. N.C.G.S. § 45-21.16(d). In the event that the property is situated in multiple counties, only one hearing needs to be held, but prior to the hearing, a Notice of Hearing must to be filed in any other county where any portion of the property is located. Id.
Prior to attending the hearing, the trustee should update the title. This is done to check for Federal Tax Liens, Requests for Notice, or other conveyances that were not filed at the time the title examination was performed at the commencement of the foreclosure. Additionally, it is required that the record owner of the property be confirmed as reflected on the records of the register of deeds not more than 10 days prior to posting the notice of sale. N.C.G.S. §45-21.16A
It is not necessary that a representative of the lender attend the hearing to testify. An affidavit of the lender along with supporting documentation may be used as evidence to prove that an order of foreclosure should be issued. Id. To issue an order authorizing the trustee to proceed with a sale, the Clerk of Court must find existence of the following:
- A valid debt of which the party seeking to foreclose is the holder;
- The right to foreclose under the instrument; and
- Notice to all parties entitled under N.C.G.S. § 45-21.16(b).Id.
The first document presented at the hearing should be a copy of the recorded substitution of trustee instrument to show that the trustee has the authority to proceed with the foreclosure action. The next item that the clerk will look for is proof of service of process on the appropriate parties as described earlier in section E(2) of this manuscript entitled “Methods of Service”. A party waives notice of a foreclosure hearing if that party attends and participates in the hearing. In Re Norton, 41 N.C. App. 529 (1979). As evidence of the validity of the debt and default thereof, a copy of the promissory note and recorded deed of trust to be foreclosed should be the submitted along with an affidavit of the lender. The right to foreclose may be determined by evidence that the terms of the deed of trust permit the exercise of the power of sale. In Re Burgess, 47 N.C. App. 599 (1980). However, lack of compliance with the notice provisions of the deed of trust and statutes may be used to dispute the right to foreclose.
While the borrower may raise other issues at the hearing, the foreclosure hearing was not intended to settle all matters in controversy between the lender and the borrower. Golf Vistas, Inc. v. Mortgage Investors, 39 NC App. 230 (1978). Pursuant to N.C.G.S. § 45-21.34, a party in interest has the right to apply to a judge of superior court for injunctive relief upon legal or equitable grounds. A borrower might contest the exact amount owed at a foreclosure hearing, however, the clerk need only find that there is a default. A determination of the amount owed is beyond the scope of the hearing. In Re Burgess.
The act of the clerk in so issuing an order authorizing the trustee to proceed with a foreclosure, or finding that such an order should not be issued, may be appealed to a judge of the district or superior court having jurisdiction at any time within 10 days after said act. N.C.G.S. §45-21.16(d1). These appeals are heard de novo. Id. As such, the judge will not be ruling on any error of the lower court. Instead, the judge will be limited to a determination based upon the same four issues considered by the Clerk of Court. In Re Watts, 38 N.C. App. 90 (1978).
While a borrower has the right to appeal the decision of the clerk of court without the need for legal justification, the foreclosure proceeding shall be stayed only upon the posting of a bond. N.C.G.S. § 45-21.16(d1). Consequently, the trustee may proceed with a foreclosure sale notwithstanding a borrower filing a notice of appeal, if that borrower fails to post the required bond. The bond will be in an amount that the clerk deems adequate to protect the opposing party from any probable loss by reason of appeal. Id.
F. Notice of Sale
Subsequent to obtaining an order of the Clerk of Court authorizing a foreclosure sale, a Notice of Sale must be posted in the area designated for posting public notices at least 20 days before the sale date. N.C.G.S. §45-21.17(1). Typically the trustee will post the Notice of Sale immediately after the foreclosure hearing has been concluded.
1. Contents. The contents of the Notice of Sale are set forth in N.C.G.S. §45-21.16A, and should be consulted for specific detail of what must be included. Generally, the Notice of Sale must include:
- A description of the subject deed of trust;
- The date, hour and place of sale;
- A description of the real property to be sold reasonably calculated to inform the public as to what is being sold;
- The terms of the sale, including the amount of the cash deposit to be made by the high bidder;
- That the property will be sold subject to taxes and special assessments, if it is to be so sold.
- If it is a residential property with less than 15 rental units, an order for possession may be issued pursuant N.C.G.S §45-21.29 in favor of the purchaser and against the parties in possession. Any person who occupies the property pursuant to a rental agreement entered into or renewed on or after October 1, 2007, may terminate the rental agreement upon 10 days written notice to the landlord. Upon termination, the tenant is liable for rent due prorated to the effective date of termination.
While not required by statute, it would prudent for the Notice of Sale to include disclaimers of warranty of title, making it clear that the property is being sold “AS IS”.
2. Service and Publication. The Notice of Sale must be mailed by first class mail at least 20 days prior to the sale date to each party entitled to notice of the hearing provided by N.C.G.S. § 45-21.16, and any party requesting notice who has complied with N.C.G.S. § 45-21.17A. N.C.G.S. § 45-21.17. If the Internal Revenue Service (IRS) files a Notice of Federal Tax Lien against the owners of the property at least 30 days before the sale date, notice of the sale must be sent by certified mail to the District Director of the IRS at least 25 days prior to the sale. 26 U.S.C. 7425.
The Request For Notice must be recorded with the Register of Deeds of the county where the property is situated prior to the filing of the Notice of Hearing, in order for the party requesting notice of the sale to be entitled to such notice. N.C.G.S. § 45-21.17A(a). A subordinate lien holder is the party most likely to file a request for notice of a sale, since its lien will be extinguished by the superior lien holder’s foreclosure. It would be prudent for a trustee to mail notice of the sale to a subordinate lienholder, even if that party has not filed a Request For Notice. Mailing notice of the sale will prevent the possibility of the lienholder arguing that due process under the 14th amendment had not been satisfied. Mennonite Board of Missions v. Adams, 462 U.S. 791 (1983). Additionally, a subordinate lienholder may be interested in bidding at the sale to protect its interest.
The Notice of Sale must be published once a week for 2 consecutive weeks in a newspaper qualified for legal advertising in the county where the property is located. N.C.G.S. §45-21.17. The period from the date of the first publication to the date of the last publication cannot be less than 7 days, and the last publication date must not be more than 10 days preceding the date of the sale. Id. When the property to be sold is situated in more than one county, the Notice of Sale must be published and posted in each county where any part of the property is situated. Id.
1. Time and Place. The sale should begin at the time designated in the Notice of Sale or as soon thereafter as practicable, but not later than one hour after the designated time unless delayed by other sales held at the same place. N.C.G.S. §45-21.23. It must be held between 10:00 A.M. and 4:00 P.M. on any day other than Sunday or a legal holiday on which the court house is closed for transactions. Id.
The foreclosure sale is held in the county where the property is situated. N.C.G.S. §45-21.4. If the property is a single continuous tract situated in more than one county, the sale may be held in any one of the counties where a part of the land is situated. N.C.G.S. §45-21.4 (b).
2. Conducting the Sale. Prior to conducting the sale, the trustee should update the title again to check for conveyances or other filings that were not of record when updating title prior to the hearing. Depending on the timing of these filings, further notices of the sale may need to be served before a sale can be carried out.
The sale is conducted as an auction. The trustee will announce the sale, also known as “crying the sale” by auctioneers, by reading the Notice of Sale aloud and taking bids. If there are no bidders present, the trustee must still cry the sale so that the sale has been validly conducted at the designated time and place. The trustee will make the first bid on behalf of the lien holder to start the bidding. This bid will typically be an amount necessary to pay off the debt. As long as the trustee’s fiduciary duty is not violated and no unfair advantage is given to any party, the trustee has substantial discretion in an attempt to obtain the highest price for the property and protect the lien holder’s interest.
The high bidder of the foreclosure sale will typically be required to make a cash deposit to the trustee. If there are any provisions with respect to the deposit in the deed of trust, the trustee must enforce these terms. N.C.G.S.§ 45-21.10. If the instrument contains no provisions for a cash deposit, the trustee may require the highest bidder to immediately make a cash deposit not to exceed the greater of 5% of the bid amount or $750.00. As previously discussed, the terms of the Notice of Sale will include a provision for the amount of cash deposit required. Id. If the high bidder fails to make the required deposit, the property may be immediately re-offered for sale. Id.
Within 5 days after the date of the sale, the trustee must file a preliminary report of sale with the Clerk of Superior Court of the county where the sale was held. N.C.G.S. § 45-21.26. While the statute does allow 5 days to file the Report of Sale, as a practical matter, it is best to file this report immediately after conducting the sale.
3. Postponement of the Sale. A foreclosure sale may be postponed to a day not later than 90 days after the original sale date without the need to republish the Notice of Sale, when good cause exists. N.C.G.S.§ 45-21.21. As long as the sale is not held later than 90 days from the original sale date, there is no limit to how many times the sale may be postponed. Id. The trustee, or agent, must publicly announce the postponement at the time and place advertised for sale, and attach to or enter on the Notice of Sale posted at the courthouse, a notice of the postponement. Id. The posted notice of postponement must state the new sale date and time, and the reason for the postponement. Id. Written or oral notice of the postponement shall be given to each party entitled to notice of sale under N.C.G.S. § 45-21.17. Id.
G. Upset Bid Period
The foreclosure sale is not final until after 10 days following the filing of the preliminary report of sale. This is because another party can offer to purchase the property by increasing the reported sale price by at least 5%, but in no event less than $750.00, within this 10-day period of time. N.C.G.S. § 45-21.27 (a). The raised bid on the property is known as an upset bid. Id. An upset bid is made by depositing cash, a cashier’s check, or certified check with the clerk of court’s office in an amount of at least 5% of the upset bid, but no less than $750.00. Id. The deposit must be made by the close of business hours on the tenth day after the filing of the Report of Sale, or the last notice of upset bid. Id. If the tenth day falls on a day in which the office of the clerk is not opened for business, the upset bid period is extended through the next day that the office is open for business. Id. Each time an upset bid is filed, another 10-day upset bid period begins. Id. The rights of the parties to the sale do not become fixed until the upset period elapses. Id.
The clerk must notify the trustee when an upset bid is made. N.C.G.S. § 45-21.27 (e1). After receiving notice from the clerk, the trustee must mail a written notice of the upset bid to the last prior bidder and the current record owner of the property. Id. When an upset bid is made, the last prior bidder is released from any further obligation on account of the bid and any deposit made by the prior bidder must be returned. N.C.G.S. § 45-21.27 (f).
The 10-day upset bid period is sometimes referred to as the borrower’s right of redemption. A power of sale may be terminated if the underlying obligation is paid off, including expenses incurred with respect to the foreclosure, prior to the expiration of the upset bid period. N.C.G.S. § 45-21.20. Therefore, after the sale has already taken place, the borrower still has the right to redeem the property until this period of time expires. Consequently, if the borrower or owner files a bankruptcy within the upset bid period, the sale is deemed void given that the sale was not considered final. In re Barham, 193 Bank 229 (E.D.N.C. 1996).
A bankruptcy filing by the owner or borrower will stay the foreclosure proceedings. If a bankruptcy petition is filed subsequent to the clerk issuing an order authorizing a sale, and before the rights of the parties to the sale became fixed, and thereafter the stay is lifted, the trustee is not required to have another foreclosure hearing. N.C.G.S. § 45-21.22 (c). The trustee can proceed to sale on the property by posting, publishing and serving notice of the sale pursuant to the provisions of N.C.G.S. § 45-21.16A, § 45-21.17, and §45-21.17A. Id.
H. IRS and U.S. Redemption Rights
The federal government requires more extensive notice of a foreclosure sale, and has greater rights with respect to its liens than other parties. As mentioned earlier, if the Internal Revenue Service (IRS) files a Notice of Federal Tax Lien against the owners of the property at least 30 days before the sale date, notice of the sale must be sent by certified mail to the District Director of the IRS at least 25 days prior to the sale. 26 U.S.C. 7425. The content of the notice must contain the following information set forth by 27 CFR 70.205:
1. The name and address of the person submitting the notice of sale;
2. A copy of each Notice of Federal Tax Lien affecting the property to be sold, or the information as shown on each Notice of Federal Tax Lien, which includes the initiating office named thereon, the name and address of the taxpayer, and the date and place of filing of the notice;
3. The street address, city, state and the legal description of the real property to be sold;
4. The date, time, place, and terms of proposed sale of the property, and
5. The approximate amount of the principal obligation, including interest, secured by the lien and a description of the other expenses (such as legal expenses) which may be charged against the sale proceeds.
If proper notice of the sale has been provided to the IRS, the IRS would then have a 120 day right of redemption which begins after the sale becomes final. 26 U.S.C. 7425 (d). At the expiration of the 120-day period, the federal tax lien will be extinguished. Should the IRS wish to redeem the property within the 120 day time frame, the IRS would need to pay the amount paid by the purchaser at the sale (if the purchaser is the holder of the lien being foreclosed, the amount of the secured obligation), interest at a rate of 6% per annum from the date of the sale, and the amount (if any) equal to the excess of the expenses necessarily incurred in connection with such property, over the income from such property (to the extent used by the purchaser) plus a reasonable rental value of such property. 28 U.S.C. 2410 (d).
I. Defaulting Bidder.
When the high bidder’s rights to the sale become fixed, the bidder is contractually obligated to pay the trustee the balance of the purchase price. When a bidder fails to comply with his bid upon the trustee tendering a deed, or after making a bona fide attempt to tender a deed, the bidder is deemed to be in default. N.C.G.S. § 45-21.30 (c). When the highest bidder at a sale defaults, the Clerk of Superior Court may, upon motion, enter an order authorizing a resale of the property. The procedure for resale of the property is the same as the original sale, and a new hearing is not necessary. Id. If a resale is necessary, the defaulting bidder will remain liable to the extent that the final sale price is less than the bid plus all costs of the resale. N.C.G.S. § 45-21.30 (d). The defaulting bidder’s deposit will secure payment of any amounts for which the bidder remains liable as a consequence of the default. Id.
J. Distribution of Proceeds Upon Foreclosure Sale
1. Sale Proceeds. Proceeds of the foreclosure sale must be distributed pursuant to the terms of N.C.G.S. § 45-21.31. The proceeds are first applied to the payment of costs and expenses of the sale, including any trustee commission. N.C.G.S. § 45-21.31 (a)(1). While property taxes and special assessments are next in line to be paid, the trustee may then apply the proceeds towards the secured obligation if the Notice of Sale provides that the property is being sold subject to unpaid taxes and assessments.
Any surplus remaining is paid to other parties who are entitled to the funds based upon claims they may have against the property. N.C.G.S. § 45-21.31 (b). If the trustee does not know who else is entitled to the surplus funds, the funds are paid to the Clerk of Superior Court. Id. In practice, it is best for the trustee to always pay the surplus funds to the Clerk of Superior Court, rather than attempting to determine what parties are entitled to funds and their priority. Payment of the surplus funds to the Clerk will discharge the trustee from liability to the extent of the amount paid. N.C.G.S. § 45-21.31 (c).
2. Trustee Fees. Compensation for the trustee is stipulated in the deed of trust. N.C.G.S. § 45-21.15 (a). The compensation is usually between 1% and 5% of the gross sales price. If no sale is held, but the deed of trust only provides for compensation when there is a sale, the trustee is entitled to ¼ of the completed sale compensation before the trustee files the notice of hearing, ½ after filing the notice of hearing, and ¾ after the hearing. N.C.G.S. § 45-21.15 (c).
3. Final Report. A final report and account of receipts and disbursements must be filed with the Clerk of Superior Court of the county where the property is situated within 30 days after receipt of the proceeds of such sale. N.C.G.S. § 45-21.33. The trustee must also file an affidavit of publication of the Notice of Sale, and an affidavit that notices of sale were served upon all parties entitled, and posted in the area designated for posting public notices in the county or counties where the property is situated 20 days prior to the sale. Id. There is also a clerk’s fee for auditing and recording the final account that must be paid when filing the final report. Id. Presently, this fee is assessed at $.45 per $100.00 of the sale proceeds, not to exceed $500.00.
It is important to ensure that complete final reports are timely filed. A delay in recording the final report and account will delay any subsequent sale of the foreclosed property by the new owner. Furthermore, if a final report is not timely filed, is incomplete or incorrect, the Clerk of Court may issue an order directing the trustee to file the report within 20 days after service of the order. N.C.G.S. § 45-21.14. Failure to comply with the order may result in contempt, and the trustee can be committed to jail until the completed and correct report is filed. Id.
4. Notice of Foreclosure. When the foreclosure is complete, the trustee must record a Notice of Foreclosure. N.C.G.S. § 45-38. The notice must identify the foreclosure action, the date and to whom the foreclosed property was conveyed, the names of all parties to the original instrument, the amount of the secured obligation, the book and page number of the deed of trust foreclosed, and the date of the Notice of Foreclosure. Id.
K. Defective Foreclosures
The procedure for foreclosure of real property has many technical requirements and many different time frames to keep track of. Despite careful training of staff, tickler systems, and reports to track the steps of foreclosure cases, errors may still occur with respect to service of process, notice requirements, or publication of the Notice of Sale. When defects are discovered during the foreclosure process, it is sometimes best to dismiss the action and re-file to ensure clear title. However, not all errors will necessarily cause the foreclosure to be defective. A Notice of Hearing was not fatally defective where it was dated December 8, 1978 stating that the hearing would be held January 3, 1978 rather than January 3, 1979. Lovell v. Rowan Mutual Fire Insurance Co., 46 N.C. App. 150 (1980). A foreclosure sale was not invalid because the notice of publication filed in the office of the clerk of court was unsigned. Britt v. Britt, 26 N.C. App.132 (1975).
From time to time a title examination may reveal a problem that may prevent commencing the foreclosure action until the issue is resolved. For example, you may discover that the deed of trust had been mistakenly canceled by the lender. A Notice and Affidavit regarding erroneous cancellation of deed of trust may be recorded at the Register of Deeds to remedy this problem and allow foreclosure to proceed. G.E. Capital Mortgage Services, Inc. v. Neely, 135 N.C. App. 187 (1999). If the trustee failed to provide adequate notice of a foreclosure sale to the IRS pursuant to a timely filed Notice of Federal Tax Lien, the redemption rights of the federal government will not expire. It is possible to cure this defect by obtaining a release of lien from the IRS. A release may be obtained by providing evidence to the IRS that its lien has no value when taking into consideration the value of the property and any liens that have priority over the lien of the United States. 26 U.S.C. 6325.
A title examination might also reveal a problem that can only be cured through a civil action before proceeding with the power of sale foreclosure, such as an inadequate or missing legal description. Since it is highly unlikely that the borrowers will execute a revised deed of trust to allow the foreclosure by power of sale to proceed, a civil action requesting reformation of the defective instrument may be necessary. While judicial foreclosures are governed by N.C.G.S § 1-339.1 et. seq., I personally have never had an issue with a deed of trust that required a judicial foreclosure.
What if a defect in the foreclosure is discovered after it has been entirely completed? If there are no subordinate liens that would have otherwise been extinguished in a proper foreclosure action, one option is to attempt to obtain a quitclaim deed from the original borrowers. Another option is having the Clerk of Court set aside the foreclosure by way of motion, and then re-foreclose to satisfy the statutory requirements.
It is also possible that the passage of time and curative statutes may cure a defect. In cases prior to May 1, 1990 where advertisements were last published from 7 to 20 days preceding the sale, all sales are validated. N.C.G.S. § 45-21.48. All foreclosures prior to July 2, 1985 where the Notice of Sale was posted for at least 15 days, but failed to post for 20 days are valid unless there was an action to set aside the sale commenced on or before October 1, 1985.
If notice was not received by a subordinate lien holder who filed a Request for Notice pursuant to N.C.G.S. § 45-21.17A, an action may be brought to set the foreclosure aside. N.C.G.S. § 45-21.17A(f). However, this action must be brought prior to the filing of the final report if purchased by a third party, and within 6 months of the final report if purchased by the secured party. Notwithstanding the possible remedies for the defects outlined above, a foreclosure of real property must be done meticulously and with great attention to detail. Time will not heal all defective foreclosure wounds, as there is no statute of limitations on defective foreclosures.Download PDF