N.C. Ct. of Appeals: CL Howard Investments v. Wilmington Savings Fund- Mortgage Modification does not Alter Seniority of Liens

Summary:

The North Carolina Court of Appeals reversed the trial court’s order granting summary judgment in favor of CL Howard Investments I, LLC and denying Wilmington Savings Fund Society’s motion for judgment on the pleadings. The case involved a dispute over lien seniority between a first Deed of Trust held by Wilmington and the second deed of trust held by CL Howard on a property following a loan modification.

The debtor initially had two deeds of trust: a senior deed for $52,850 and a junior deed for $22,650, both recorded on January 18, 1999. In 2014, after the maturity date, the senior lender modified the loan, extending its maturity to 2033 and recapitalizing the unpaid balance. The junior deed of trust was later foreclosed in 2021, and CL Howard purchased the property, arguing that the loan modification extinguished the senior deed’s priority.

The trial court ruled in favor of CL Howard, determining that the loan modification, recorded after the junior deed’s initial filing, effectively extinguished the senior lien, making the junior deed the priority lienholder.  According to trial court,  by failing to obtain a subordination agreement from CL Howard,  Wilmington Savings Fund lost its senior status.

The Court of Appeals disagreed, holding that the loan modification merely extended the terms of the senior deed of trust and did not extinguish its priority. The court found that North Carolina law, statutory provisions, and legal precedent support the continued priority of the senior lien, even after a loan modification, unless the modification materially prejudices junior lienholders—which was not the case here.

Because the trial court incorrectly enjoined foreclosure of the senior deed and extinguished its priority, the Court of Appeals reversed the decision and remanded the case for further proceedings consistent with its opinion.

Commentary:

A contrary holding would have provided second mortgage holders with a near total ability to block any mortgage modification,  which can be difficult enough to obtain.  That's what makes the most surprising aspect of this case being that Wilmington Savings fund actually granted  the homeowner  a mortgage modification in the first place,  as it seems utterly incapable or unwilling to agree to those.

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