N.C. Court of Appeals: REO Properties v. Smith- Constructive Notice of Lis Pendens

Summary:

In 1986, the Smiths acquired title to Lot #184 of Crestview Subdivision, 106 Crestview Terrace, in Davidson County, Thomasville, North Carolina (“the property”) and recorded the Deed. The Smiths executed a promissory note in the principal amount of $96,000 (“the Note”) to New Century Mortgage Corporation (“New Century”) secured by a Deed of Trust on the property that was recorded on 16 December 2002. The Deed of Trust included the correct address of the property as 106 Crestview Terrace, Thomasville, North Carolina, the legal description attached to the Deed of Trust did not, however, fully and completely describe the property.

REO discovered the mistake and on June 26, 208, brought suit seeking reformation of the Deed of Trust and a resulting or constructive trust, recording a Notice of lis pendens under file number 08 M 343 with the Davidson County Clerk of Court. On April 13, 2009, the Smiths filed a voluntary bankruptcy, initially as a Chapter 13, which was later converted to Chapter 7. Following the conversion, the property was set for auction, but the bid of $10,000 was subsequently held to be of no benefit to the estate and the property was abandoned to the Smiths. The property was condemned by the City of Thomasville, at which point the Smiths conveyed it to the Burtons. When informed by REO of the lis pendens, the Burtons intervened in the reformation case. arguing that prior to purchasing the property they had conducted a “due, proper, diligent and prudent title search” which “did not reveal the existence of The Deed of Trust with a legal description of The Property” and that the Notice of lis pendens was not cross indexed with the reformation actions and was no longer maintained in the paper records of the Davidson County Clerk of Court “probably because the case was over.” The Notice of lis pendens was, however, maintained on microfiche by the Clerk.

The Burtons argued that prior to purchasing the property they had conducted a “due, proper, diligent and prudent title search” which “did not reveal the existence of The Deed of Trust with a legal description of The Property” and that the Notice of lis pendens was not cross indexed with the reformation actions. Further, the Notice was no longer maintained in the paper records of the Davidson County Clerk of Court, as allegedly explained by a Deputy Clerk since the records had “been sent to Raleigh …probably because the case was over.” The Notice of lis pendens was, however, maintained on microfiche by the Clerk. The Court of Appeals held that the microfiche was a public record that should have been discovered by the Burtons.

As such, the Court of Appeals determined that the Burtons’ had constructive notice of the lis pendens, and thus were merely subsequent purchasers for value. N.C.G.S. § 1-116(a) requires that a Notice of lis pendens be cross-indexed in actions affecting title to real property. “The purpose of filing and cross-indexing a Notice of Lis Pendens is to give a subsequent purchaser of the affected
property constructive notice of the pendency of an action.” See N.C.G.S. § 1-118. Because of their constructive knowledge the Burtons were “intermeddlers” and not protected from the notice of lis pendens.

Commentary:

It is good to know that a $10,000 asset in the Middle District would not benefit the estate and should be abandoned. (There were $15,060.80 in priority and $113,997.86 in general unsecured claims.)

For a copy of the opinion, please see:

REO Properties v. Smith- Constructive Notice of Lis Pendens.pdf

About

1. Bachelor of Arts degree in English Literature from Washington University, 1993. 2. Juris Doctor degree from George Washington University, 1996. Admissions to Practice of Law: North Carolina Bar, 1996. Federal District Courts for the Eastern and Middle Districts of North Carolina. Specialty Certification: North Carolina State Bar: Certified as a Specialist in Consumer Bankruptcy. Areas of Practice: Practice limited to consumer and business debtor bankruptcy law, 1998 to present. Memberships: National Association of Consumer Bankruptcy Attorneys (NACBA). North Carolina Academy of Trial Lawyers (NCATL). North Carolina Bar Association, Bankruptcy Section. Lectures prepared and presented: North Carolina Academy of Trial Lawyers seminar on bankruptcy; Topic: Counseling the Consumer Debtor Prior to Court - C.Y.A. Forms to Help 'Gird They Loins'; 2001. Middle District Bankruptcy Seminar; Topic: Preparing Chapter 13 Plans; 2002. NACBA National Convention; Topic: Efficient Office Practices; 2003. NACBA National Convention; Topic: Chapter 7 vs. Chapter 13 Debates; 2004. Middle District Bankruptcy Seminar; Topic: Chapter 7 & 13 Hot Issues; 2004. Positions held: NACBA National Convention; Convention Chair; 2008. NACBA National Convention; Panel Moderator: Topic: Basic Bankruptcy Issues; 2008. NACBA National Convention; Panel Moderator; Topic: Chapter 13-Disposable Income and Other Issues; 2007. NACBA National Convention; Panel Moderator; Topic: Representing Members of the Military and Their Families; 2007. NACBA, Member of National Board of Directors, 2006 to present. NCATL, Chair of the Bankruptcy Section, 2003 to 2007. NACBA, Chair of the North Carolina Section, 2003 to 2007. NC Bar Association, Bankruptcy Section, Bankruptcy Council Member, 2004 to present.

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