North Carolina HB 770 Update

Re: North Carolina HB 770 (N.C.G.S. 45-10)

On August 30, 2017, the North Carolina Legislature passed into law S.L. 2017-206. This law amends several provisions of the North Carolina General Statutes, specifically N.C.G.S. 45-10. Effective immediately, the law amends subsection (a) and adds subsection (d) to N.C.G.S. § 45-10 by including language which defines a “noteholder,” clarifying an attorney’s role while representing trustees in a deed of trust, and placing limitations on the trustee’s relationship with noteholders and borrowers.

The text was amended to incorporate the term “noteholder” as the party which may substitute a trustee in a deed of trust. This was accomplished by using only the term “noteholder” in subsection (a) and defining “noteholder” with nearly identical text from the previous version of the code under new subsection (d). As was the case prior to the amendments, a substitution of trustee was conducted exclusively by the noteholder or an agent of the noteholder with proper power of attorney.

N.C.G.S. § 45-10 is amended by including new language that further clarifies the trustee’s attorney’s position of neutrality in a foreclosure proceeding. The statute now expressly states that an attorney for the trustee cannot represent a noteholder or borrower while initiating a foreclosure proceeding. It is not known what, exactly, is meant by “initiating a foreclosure,” but generally this refers to a trustee’s first act (i.e., first legal or filing of the notice of hearing). Maintaining a neutral status between the trustee and other parties (i.e., the noteholder and borrower) in a foreclosure proceeding is a long-standing requirement of attorneys in North Carolina. A statement with regards to the trustee’s neutrality is part of the requirements for the notice of hearing under N.C.G.S. § 45-21.16(c)(7)b. The amendments codify that the attorney for the trustee must not simultaneously represent either party while the foreclosure is on-going. This issue has been previously discussed in court opinions but never codified until now.

Although the trustee is a neutral party by statute, the legislature included exceptions to the general rule. First, the amendments allow an attorney representing a trustee in a foreclosure to simultaneously represent the noteholder in an “unrelated matter.” The statute does not address what is considered an “unrelated matter.” The legislative intent is to allow an attorney representing the trustee to not be subject to a conflict of interest from representing the noteholder in a separate matter. The inclusion of this language allows for the trustee to remain neutral in the foreclosure proceeding, while also allowing an escape route for the attorney should the foreclosure become contested.

An attorney who has initiated a foreclosure proceeding as trustee’s counsel may resign from representing the trustee and subsequently represent the noteholder. The amendment allows this to happen if the matter becomes “contested” (although the legislature fails to define what constitutes “contested”). This is not a new concept in representing the trustee, rather the new language acts as codification of a practice allowed under a 2013 North Carolina ethics opinion (see 2013 NC Eth. Op 5), which was upheld in the recent North Carolina Court of Appeals case, In re Goddard and Peterson, PLLC 789 S.E.2d 835 (2016).

In conclusion, the purpose of these amendments to N.C.G.S. § 45-10 is to clarify the law while codifying elements of case law and state ethic opinions. Aspects of this new law were either presented in case law, ethics opinion, or representative of a common practice by attorneys. Furthermore, these amendments seem consistent with prior changes to N.C.G.S. § 45-10, which also provided clarification and guidance as to the trustee’s relationship and appointment. There are still unknown avenues with the amendments to N.C.G.S. § 45-10 that may be expounded by litigation or clarification from the legislature (e.g., defining “initiating a foreclosure proceeding,” “contested hearing,” and “unrelated matter”). Ultimately, the changes to N.C.G.S. § 45-10 will not immediately impact the established practice of Brock & Scott, PLLC.