September 6

New Statute Prohibits Naming Trustees as Parties in Condemnation Cases

2  comments

Update!: The North Carolina General Assembly has now posted the text of N.C. Gen. Stat. §45-45.3, the new statute prohibiting naming trustees as defendant parties in almost all civil actions, including condemnation cases.  To see that version of the statute, you should click here.

(As February 14, 2012, however, the new statute is still not available on Westlaw.)

N.C. Gen. Stat. §45-45.3 and North Carolina Eminent Domain Cases

North Carolina has just ratified a bill, signed by the Governor, that is partially entitled,

“AN ACT TO MODERNIZE AND ENACT CERTAIN PROVISIONS REGARDING DEEDS OF TRUST, … ELIMINATING TRUSTEE OF DEED OF TRUST AS NECESSARY PARTY FOR CERTAIN TRANSACTIONS AND LITIGATION….”

S.B. 679, 2011 Sess. Law 312 (the “Act”).

The Act, which is effective October 1, 2011, modifies North Carolina General Statutes in Chapters 24 (Interest), 45 (Mortgages and Deeds of Trust), and 161 (Register of Deeds). It also creates a new statute, N.C. Gen. Stat. § 45-45.3, which is entitled, “Trustee in a deed of trust” and is set out below.  That statute effectively prohibits a condemnor from naming a trustee under a deed of trust as a defendant. If a condemnor does name a trustee as a party, the statute permits the improperly joined trustee to seek and receive an involuntary dismissal. In addition the statute provides for costs and attorneys’ fees to the named trustee.

So, as of October 1, 2011, North Carolina condemnors may no longer name trustees under deeds of trust as parties to the condemnation lawsuit, despite existing North Carolina condemnation statutes that require condemnors to name all owners or holders of an interest in the property that is the subject of the condemnation case (the “subject property”).

The rest of this post steps through the current law on whom public condemnors must name in eminent domain cases.  It also sets out the new statute and suggests a path forward for condemnation complaints and declarations of taking filed on or after October 1, 2011.

North Carolina law Requires the Declaration of Taking to Name All Owners, Interest Holders or Claimants

To start a condemnation case under Article 3 of Chapter 40A of the North Carolina General Statutes, a local public condemnor files a complaint containing a declaration of taking that must include

(4) The names and addresses of those persons who the condemnor is informed and believes may be or, claim to be, owners of the property

N.C. Gen. Stat. §40A-41.  Similarly, the NCDOT or any other condemnor authorized to proceed under the “quick-take” statutes of Article 9 of Chapter 136 of the General Statutes must include in its declaration of taking,

(4) The names and addresses of those persons who the Department of Transportation is informed and believes may have or claim to have an interest in said lands.

N.C. Gen. Stat. §136-103.

Who are the “owners of the property” or “those persons who… may have or claim to have an interest” in the subject property? Article 9 of Chapter 136 does not say, but under the definitions of N.C. Gen. Stat. §40A-2,

(5) “Owner” includes the plural when appropriate and means any person having an interest or estate in the property.

(6) “Person” includes the plural when appropriate and means a natural person, and any legal entity capable of owning or having interest in property.

[and]

(7) “Property” means any right, title, or interest in land, including leases and options to buy or sell. “Property” also includes rights of access, rights‑of‑way, easements, water rights, air rights, and any other privilege or appurtenance in or to the possession, use, and enjoyment of land.

Obviously, the declaration must name the property’s fee simple owners.  But a deed of trust (the normal mortgage instrument in North Carolina, a “title theory state”) also creates an interest and estate in land in the trustee. So, if a subject property is burdened by a deed of trust, then the above statutes require the declaration to name at least the trustee to any deed of trust.

N.C. Gen. Stat. §45-45.3 Prohibits Naming Trustee as a Party in Condemnation Cases

At the bottom of page 17 of the 28-page bill, the Act creates N.C. Gen. Stat. §45-45.3, which effectively prohibits naming trustees as parties in all civil lawsuits except foreclosures and power of sale cases. First on the statute’s list of non-exclusive civil actions to which it applies is condemnation. The relevant part of the Act creating the statute is set out here:

SECTION 15. Article 5 of Chapter 45 of the General Statutes is amended by adding a new section to read as follows:

Ҥ 45-45.3. Trustee in a deed of trust.

(a) The following definitions apply in this section:

(1) Secured creditor. – The holder, owner, or assignee of the obligation secured by a deed of trust.

(2) Trustee. – The trustee or substitute trustee then serving as such under the terms of a deed of trust.

(b) Unless the deed of trust provides otherwise, all of the following may be done without the knowledge, consent, or joinder of the trustee:

(1) Pursuant to G.S. 45-36.23, an obligation may be declared by the owner and holder of the obligation to be no longer secured by the deed of trust.

(2) Property may be released from the lien of a deed of trust by the secured creditor.

(3) The lien of a deed of trust may be released or subordinated by the secured creditor.

(4) The terms of a deed of trust may be modified by the secured creditor and the then record owner of the property encumbered by the lien of the deed of trust.

(5) The deed of trust may be satisfied of record by the secured creditor.

(c) Except in matters relating to the foreclosure of the deed of trust or the exercise of a power of sale under the terms of the deed of trust, the trustee is neither a necessary nor a proper party to any civil action or proceeding involving (i) title to the real property encumbered by the lien of the deed of trust or (ii) the priority of the lien of the deed of trust. Examples of civil actions or proceedings in which the trustee is neither a necessary nor a proper party include, but are not limited to, civil actions or proceedings relating to:

(1) Condemnation.

(2) Bankruptcy.

(3) The establishment or correction of title to real property, including, but not limited to, actions to quiet title, reform land records, or resolve boundary line disputes.

(4) Fraudulent conveyances.

(5) The creation or enforcement of an attachment or judgment lien.

(6) The foreclosure of a lien other than the lien of the deed of trust, regardless of whether the lien is superior or subordinate to the lien of the deed of trust, including, but not limited to, the foreclosure of mortgages, other deeds of trust, tax liens, and assessment liens.

(7) The establishment, perfection, or enforcement of a mechanic’s or materialman’s lien.

(8) The creation or enforcement of a constructive trust, resulting trust, or equitable lien relating to the property.

(9) The partition of real property.

(10) The interpretation or enforceability of a will, trust, or estate.

(11) A subrogation claim or other equitable claim or defense involving the priority or enforceability of a deed of trust.

(12) Determination or enforcement of rights and obligations involving easements or restrictive covenants.

(d) If a trustee is improperly joined as a party to an action or proceeding when this section provides that the trustee is neither a necessary nor a proper party to that action or proceeding, then:

(1) Upon motion duly made by any party to the action or proceeding, the trustee shall be dismissed from the action or proceeding;

(2) Regardless of whether the trustee makes an appearance in the action or proceeding, no entry of a default or default judgment shall be entered against the trustee; and

(3) If the trustee makes an appearance in the action or proceeding, each person who improperly joined the trustee as a party to the action or proceeding shall be jointly and severally liable to the trustee for all the expenses and costs incurred by the trustee in the defense of the action or proceeding or in obtaining the trustee’s dismissal from the action or proceeding, including the reasonable attorneys’ fees actually incurred by the trustee.

(e) Except as expressly provided in this section, this section is not in derogation of case law and statutory provisions that vest legal title to property conveyed by a deed of trust in the trustee named therein.”

One Possible Path Forward

N.C. Gen. Stat. § 40A-41 requires a condemnors’ declaration of taking to include the names of “owners” of the subject property, and  N.C. Gen. Stat. §40A-2(5) defines “owners” to to be anyone “having an interest or estate in the property”. The “quick-take” parallel, N.C. Gen. Stat. §136-103, is even more direct and requires the declaration to include the names of everyone “having an interest or estate in the property.” Clearly, a trustee qualifies as an owner or person having an interest or estate in the subject property.  So, how should a condemnor comply with the condemnation filing requirements while following the new N.C. Gen. Stat. § 45-45.3 that prohibits the condemnor from naming a trustee under a deed of trust as a party to the lawsuit?

One way might be to name the trustee in the declaration, but not as a defendant party in the complaint. While the condemnation statutes require the declaration to include the names of the owners, interest holders or claimants, they do not actually require those people to be named as defendants (perhaps because condemnation cases are in rem actions.) So, the declaration could list the trustee’s name and describe its interest, without naming the trustee as a defendant party in the caption or complaint. As a result, the complaint would not join the trustee as a named party to the lawsuit and would, therefore, comply with the new statute.

In addition, N.C. Gen. Stat. § 45-45.3 does not prohibit a condemnor from joining a beneficiary under a deed of trust as a defendant.  So, the beneficiary can still be named in the complaint as well as included in the declaration of taking.

What do you think?

You may be a fellow eminent domain lawyer who represents condemnors and drafts complaints and declarations of taking. On the other hand, you may represent property owners in condemnation cases and have to deal with banks and their trustees to draw down your clients’ deposits. Finally, you may represent mortgagees, trustees or beneficiaries and have concerns about notice issues. Whatever your role, please share your thoughts on N.C. Gen. Stat. § 45-45.3 and how you plan to deal with the new law by leaving a comment below.

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Christopher J. Simmons, Attorney at LawChristopher J. Simmons is an attorney licensed in North Carolina and Florida and practicing as an associate city attorney with the City of Raleigh, North Carolina.


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  • Section 15 of the Session Law is highly significant in that it eliminates the requirement for the joinder of the trustee almost every action by the mortgagee with the exception of foreclosure. Now, the owner and holder of the obligation an obligation may declare it no longer secured by the deed of trust, may release property from the lien of a deed of trust, may release or subordinate the lien of a deed of trust may be modify the terms of a deed of trust with the joinder of the owner of the property encumbered by the lien of the deed of trust and may satisfy the deed of trust of record.

    In the United States, a few states are “title theory” states while most are “lien theory” states. In title theory states, legal title to the property securing the debt is vested in the mortgagee or trustee of the Deed of Trust. The mortgage or Deed of Trust operates as a conveyance of the property to secure a debt, while the borrower retains equitable title. In a lien theory state, a mortgage or a deed of trust merely creates a lien upon the title to the real property much in the way a judgment attaches, while the borrower continues to hold both legal and equitable title. It can be convincingly argued that this amendment moves North Carolina from a modified title theory state fully to a lien theory jurisdiction with the majority of jurisdictions.

    The obvious result is that only the beneficiary need be served in an action wherein the interest secured is affected.

    The less obvious result is that the named beneficiary in the instrument may be neither the proper nor necessary party in the pending litigation. This is because NCGS Sec. 47‑17.2 obviates the need for recording assignments of a deed of trust.

    “It shall not be necessary in order to effect a valid assignment of a note and deed of trust, mortgage, or other agreement pledging real property or an interest in real property as security for an obligation, to record a written assignment in the office of the register of deeds in the county in which the real property is located. A transfer of the promissory note or other instrument secured by the deed of trust, mortgage, or other security interest that constitutes an effective assignment under the law of this State shall be an effective assignment of the deed of trust, mortgage, or other security instrument. The assignee of the note shall have the right to enforce all obligations contained in the promissory note or other agreement, and all the rights of the assignor in the deed of trust, mortgage, or other security instrument, including the right to substitute the trustee named in any deed of trust, and to exercise any power of sale contained in the instrument without restriction. The provisions of this section do not preclude the recordation of a written assignment of a deed of trust, mortgage, or other security instrument, with or without the promissory note or other instrument that it secures, provided that the assignment complies with applicable law. “

    Thus, we will not always know whom to serve…there is discussion afoot to require assignment which may ameliorate this concern to a degree.

    Chris Burti
    Vice President & Senior Legal Counsel at Statewide Title, Inc.

  • A few observations:

    1. If the trustee is an affiliate of or attorney for the noteholder, as used to be the case and still may be, notification to them (but not joinder as a party) may be one of the most effective means to identify the true current noteholder. However, in most large entity mortgagee situations, as Chris Burti noted, the trustee may have no more idea than the condemning authority as to the identity of the actual noteholder. Obviously the borrower-owner would at least know the servicers to whom they were making payments, a matter which can be determined during the condemnation action. Presumably if the borrower-owner does not notify that noteholder and tries to take proceeds without notifying them, they may well trigger a default under the mortgage in any event.

    2. The trustee as trustee of the deed of trust only, has always had limited powers and could not participate in the litigation unilaterally without approval of the noteholder. That trustee’s powers were related to exercising the power of sale in the event of a default in the loan.

    3. Perhaps a legislative fix to bring the condemning authorities’ statutes in sync with the new GS 45-45.3 should be recommended.

    Thank you Christopher for emailing me about your blog!

    Nancy

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