Sun Trust sued to collect on deficiencies following a foreclosure in North Carolina. The Debtors raised defenses challenging the validity of the debt and the default. The Court of Appeals held that the determination of a valid debt and default at the foreclosure hearing was res judicata. While the Debtors could not have raised these equitable defenses in the hearing under N.C.G.S. § 45-21.16, they could have raised such defenses in a proceeding to enjoin the foreclosure under N.C.G.S. § 45-21.34 (2006). The failure by the Debtors to do so resulted in the rights of the parties to the foreclosure becoming "fixed" and therefore barred the Debtors from raising such an equitable challenge in a later proceeding in a different court.
Commentary:
While I have not reviewed the underlying state court nor district court dockets, the 4th Circuit seems, at least in its own description of the facts, in this case to misunderstand several aspects of North Carolina foreclosures. First, it discusses that "a North Carolina superior court had already determined to be valid during a hearing to confirm the power of sale foreclosure pursuant to N.C. Gen. Stat. § 45-21.16 (2006)" (Emphasis added.) It is not, however, a Superior Court that presides over such a hearing, but instead, as stated in N.C.G.S § 45-21.16 (d), it is the clerk of court that makes the required determinations. This impacts whether the issues can be considered to be fully litigated, a requirement for res judicata. Further, while N.C.G.S § 45-21.16 (d)(i) and (ii) does require that the Clerk of Court find that there is a "valid debt of which the party seeking to foreclose is the holder" and that there has been a "default", the Clerk is not required to determine the amount of the debt or the default. In fact, the Clerk of Court is not allowed to make such a determination. Again, this would show that the question of the amount of the debt had not actually been litigated and res judicata should not apply.
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