N.C. Court of Appeals: BB&T v. Teague & Glover- Priority of Reformed Deed of Trust against Bona Fide Purchaser

Summary: While working as a bookkeeper for Teague & Glover, P.A., (T&G) Ms.  Gibbs embezzled substantial amounts.  In addition to criminal prosecution and imprisonment, in 2010, T&G obtained a civil judgment against Mr.  and Mrs.  Gibbs for $800,000.  T&G subsequently agreed to accept all of the Gibbses real and personal property in exchange for a reduction in the amount of the judgment. The property at issue in the present dispute consists of Tract A (0.6 acres) and Tract B (0.7 acres and the Gibbses primary residence).  In 1999 and 2005, the Gibbses had granted BB&T a Deed of Trust against both tracts, but in 2009 they refinanced with the new Deed of Trust being secured only by Tract A.  T&G took the property subject to the Deed of Trust, without assuming liability for the underlying note. T&G discovered that Tract B was unencumbered and sold Tract B at auction.  BB&T then filed suit seeking reformation of the 2009 Deed of Trust to include Tract B, impose an equitable lien on both tracts and to foreclose.  The trial court granted summary judgment to T&G. BB&T appealed arguing that it was entitled to reformation and that such reformed Deed of Trust should relate back to the date of the original Deed of Trust, thereby preserving its priority over T&G. The Court of Appeals rejected this argument, holding that "[t]he general rule is that reformation will not be granted if prejudice would result to the rights of a bona fide purchaser for value without notice or someone occupying a similar status."  Arnette v.  Morgan, 88 N.C. App.  485 (1988).  Here T&G, by granting a reduction in the judgment, was a bona fide purchaser for value.  Further, T&G had no notice that either BB&T or the Gibbses claimed there was an error in the 2009 Deed of Trust.    If the 2009 Deed of Trust rested on a mutual mistake by BB&T and the Gibbses, any reformed Deed of Trust would not have priority over the claims of a bona fide purchaser. The Court of Appeals distinguished this case from Williams Masonry v.  Vision Contractors, 103 N.C. App.  597 (1991), where it gave priority to a reformed Deed of Trust over the claim of liens of subcontractors, finding that subcontractors were not bona fide purchasers for value and thus not entitled to protection from reformation. As T&G did not have any agreement with or fiduciary duty to BB&T, BB&T could not subvert the priority rules by asserting a equitable lien. The Court of Appeals did, however, find that a genuine issue of material fact existed concerning whether T&G would be prejudiced by a reformation of the 2009 Deed of Trust.  While concurring with the rest of the opinion, Judge Ervin dissented from this portion. Commentary: As a bankruptcy trustee stands in the shoes of a bona fide purchaser, this case reinforces the line of North Carolina bankruptcy cases avoiding Deeds of Trust due to recording errors. For a copy of the opinion, please see: BB&T v. Teague & Glover- Priority of Reformed Deed of Trust against Bona Fide Purchaser.pdf