N.C. Court of Appeals: In re Falk- Life of Mortgage Lien and Equitable Subrogation in Reformation of Mortgage Priority

Summary: Quicksilver purchased an apartment complex in 1992, with $4.6 million in financing from the seller and $550,000 from the Charlotte Falk Irrevocable Trust (Falk Trust). Quicksilver later executed a promissory note and Deed of Trust to the Falk Trust, which was recorded on October 28, 1994. Quicksilver defaulted on the note in December of 1994 and, despite several payments in the intervening years, failed to remedy the default. On July 2, 1999, Quicksilver entered into a promissory note and Deed of Trust with Wachovia Bank. The Wachovia Deed was recorded on July 7, 1999, and the Falk Trust granted a subordination agreement, recorded on March 15, 200, moving the Wachovia Deed of Trust into first priority. Thereafter, Quicksilver refinanced the Wachovia note with a new note and Deed of Trust from Lend Lease Mortgage Capital and FNMA, which was recorded on May 14, 2001. Ten years later, a slew of foreclosures, suits and counter-suits left he courts to determine the priority of the Falk and FNMA Deeds of Trust. The trial court granted summary judgment in favor of FNMA, relying on N.C.G.S. § 45-37(b) to find that the Falk Trust’s lien against the property had expired. Following Smith v. Davis, 228 N.C. 172, 45 S.E.2d 51 (1947), the Court of Appeals reversed the trial court, holding that the conclusive presumption “does not arise until after the expiration of the fifteen-year period and does not benefit those who gain an interest in the property before the presumption arises.” Because the FNMA Deed of Trust was only recorded approximately six and a half years after the Falk Deed of Trust, the life of lien provisions of N.C.G.S. § 45-37(b) did not apply. FNMA, however, contended that the new life of lien statute, found at N.C.G.S. § 45-36.24, applies instead. Unlike N.C.G.S. § 45-37(b), this provision would not “prevent a lien from expiring as to a party acquiring an interest in the collateral before the expiration of the fifteen-year period.” N.C.G.S. § 45-37(b)(1), however, was made this life of lien statute retroactive to security instruments recorded prior to October 1, 2011. While retroactive laws are not prohibited, such laws cannot retroactively “impair the obligations of contracts or disturb vested rights.” Bateman v. Sterrett, 201 N.C. 59, 63, 159 S.E. 14, 17 (1931). Here the interests of the Falk Trust were vested prior to the enactment of N.C.G.S. § 45-36.24, and application of this statutory change would be unconstitutional. FNMA also argued that under the principle of equitable subrogation its lien should be entitled to priority. In Wallace v. Brenner, 200 N.C. 124, 156 S.E. 795 (1931), the North Carolina Supreme Court held that “where the lender seeking subrogation was not a mere volunteer and was not guilty of culpable negligence, and where the intervening lienor was not prejudiced, it would be inequitable not to grant the lender subrogation.” Subsequently, however, in Peek v. Wachovia Bank & Trust Co., 242 N.C. 1, 15, 86 S.E.2d 745, 755 (1955), and First Union Nat. Bank of North Carolina v. Lindley Laboratories, Inc., 132 N.C. App. at 130-31, 510 S.E.2d at 188-89, only “excusably ignorant” lien-holders were granted equitable subrogation. As the Falk Deed of Trust was recorded, FNMA could not claim excusable ignorance. For a copy of the opinion, please see: Falk- Life of Mortgage Lien and Equitable Subrogation in Reformation of Mortgage Priority.pdf