Update on North Carolina Case Law

Written by Associate Attorney Devin Chidester


On December 21, 2016, the Supreme Court of North Carolina held the principle of res judicata does not apply to a non-judicial foreclosure. See In Re Lucks, 369 N.C. 222, 794 S.E.2d 501 (2016).  The Court reached this conclusion through review of the scope of allowable evidence and applicability of the North Carolina Rules of Civil Procedure in a non-judicial foreclosure.  Specifically, they focused on the role of a “dismissal” and “competency, admissibility, and sufficiency” of presented evidence at a trial court hearing. Id. at 228, 794 S.E.2d at 506.

In July 2006, Gordon Lucks executed a promissory note and deed of trust encumbering his property in Buncombe County.  The deed of trust contained a standard power of sale clause as used in North Carolina.  According to Deutsche Bank National Trust Company (“Deutsche Bank”), noteholder of the underlying debt, Mr. Lucks defaulted on his loan in October 2010 by failure to make timely payments. Id. at 224, 794 S.E.2d at 503.  In September 2013 the Ford Firm, acting as substitute trustee, initiated a special proceeding for a non-judicial foreclosure.  At the foreclosure hearing, the Ford Firm failed to provide evidence they were appointed substitute trustee per N.C.G.S. §45-10.  This resulted in the attending clerk “dismissing” the matter. Id.  In June 2014, Cornish Law, acting as substitute trustee for the same deed of trust, initiated a new non-judicial foreclosure for the debt owed by Mr. Lucks. Id.  The assistant clerk found proper documentation which established that the Ford Firm was actually trustee at the time of the original “dismissal” now brought by Cornish Law, PLLC.  The Clerk reasoned that the principles of res judicata required her to dismiss the second foreclosure because the Ford Firm and Cornish Law, PLLC were “in privity” with one another, thus Cornish Law, PLLC could not proceed with the foreclosure. Id.

Deutsche Bank appealed the second dismissal to Superior Court per N.C.G.S. §45-21.16(d1).  At the appeal hearing, Deutsche Bank presented evidence demonstrating the right of Cornish Law, PLLC to proceed with a non-judicial foreclosure, specifically using a power of attorney (referred to in the opinion as “Exhibit 4”) allowing a mortgage servicing company to appoint trustee on behalf of Deutsche Bank. Id., 794 S.E.2d at 504.  Exhibit 4 was a fourteen-page document signed by the bank and notarized on November 21, 2013.  The last page of the document revealed a recording stamp from Montgomery County Register of Deeds dated 2010. Id. at 225, 794 S.E.2d at 504.  The recording information was three years prior to execution of the power of attorney, it was eleven pages instead of fourteen as represented by Deutsche Bank, and was not recorded in the county in which the witness testified where power of attorney documents are traditionally recorded[1].  Mr. Lucks objected and the trial court sustained the objection ruling that Exhibit 4 failed “to provide a proper foundation” and was “hearsay.” Id.  The trial court also stated that the “the document is internally inconsistent” and “has inconsistent dates.” Id.  The trial court “dismissed” the foreclosure “with prejudice” as a result. Id.  Deutsche Bank appealed the trial court’s decision.  The Court of Appeals held that the Rules of Evidence are relaxed for non-judicial foreclosures and reversed the trial court’s decision.  Mr. Lucks appealed to the Supreme Court of North Carolina.

The Supreme Court addressed two issues in Lucks: 1) whether the principal of res judicata applies in a non-judicial foreclosure, and 2) whether the trial court abused its discretion by finding Deutsche Bank failed to establish the appointment of the substitute trustee and the effect if so. Id. at 228, 794 S.E.2d at 506-07.  The Court reasoned the Rules of Civil Procedure do not apply “unless explicitly engrafted into the statute.” Id. at 226, 794 S.E.2d at 505.  The Court’s rational was based on the fact that the General Assembly intentionally crafted Chapter 45 to be a “comprehensive and exclusive statutory framework” for non-judicial foreclosures. Id. at 222-223, 794 S.E.2d at 505.  The Court continued the analysis by determining Chapter 45 requires a creditor to prove “its right to proceed.” Id.  A clerk or trial court is granted authority through Chapter 45 to authorize or allow a foreclosure.  If the clerk or trial court does not find sufficient evidence to proceed then that denial does not “implicate res judicata or collateral estoppel in the traditional sense.Id. at 227, 794 S.E.2d at 506.  Furthermore, a non-judicial foreclosure is not a judicial action. Id. at 229, 794 S.E.2d at 507.  Rather, it is a special proceeding in which the clerk or trial court’s authority is limited in scope to the elements found in N.C.G.S. § 45-21.16(d).  Thus, as the Court states, “the Rules of Civil Procedure and traditional doctrines of res judicata and collateral estoppel applicable to judicial actions do not apply.” Id.

The Court next reviewed the discretionary authority of admissible evidence as vested in the clerk or trial court under Chapter 45.  The Court accepted the holding from the Court of Appeals which stated that the Rules of Evidence are relaxed for a non-judicial foreclosure. Id.at 228, 794 S.E.2d at 506.  The Court, however, did not agree that that lower court abused discretion by sustaining borrower’s objection.  A clerk or trial court has full authority to review evidence presented (or objected to) for “competency, admissibility and sufficiency” and this authority vests only with the clerk or trial court. Id.  For instance, a borrower can raise evidentiary objections that negate requirements of N.C.G.S. § 45-21.16(d).  This must be done at the hearing since a non-judicial foreclosure is not within the Rules of Civil Procedure (i.e., no “answer” is required to be filed and cross claims are not allowed).  Although the Rules of Evidence are relaxed, the creditor must prove the right to proceed with the foreclosure.  The clerk or trial court is charged with review of the borrower’s objection, and, if the evidence is insufficient, the clerk or trial court may prohibit the foreclosure from proceeding.

The Court then examined if the trial court abused its discretion by finding against Deutsche Bank with regards to the appointment of substitute trustee.  The Court held discretion was not abused, because the trial court’s exclusion of Exhibit 4 was not unreasonable. Id.  As the Court points out, the specific standard of review is a “showing that its ruling was manifestly unsupported by reason and could not have been the result of a reasoned decision.” Id. (quoting State v. Riddick, 315 N.C. 749, 756, 340 S.E.2d 55, 59 (1986) (citing, inter alia, White v. White, 312 N.C. 770, 777, 324 S.E.2d 829, 833 (1985))).  In In Re Lucks, the trial court excluded Exhibit 4 because it was clearly inconsistent.  The Court opined that due to relaxed Rules of Evidence Deutsche Bank could have proffered evidence to overcome the inconsistencies but simply did not.  Thus, the trial court was within their discretion to exclude Exhibit 4.  Id. at 229, 794 S.E.2d at 507.

The Court reached two conclusions in In Re Lucks: 1) the trial court did not abuse discretion by sustaining borrower’s objection to Exhibit 4, and 2) the clerk and trial court orders “dismissing” the foreclosure were erroneously entered because the traditional rules of res judicata and collateral estoppel do not apply in a non-judicial foreclosure. Id. The second conclusion has implications outside of the instant case.  It impacts the entirety of non-judicial foreclosure law in North Carolina because a definitive case now exists that holds the Rules of Civil Procedure do not strictly apply to non-judicial foreclosures unless expressly provided by statute.  The legislature in crafting Chapter 45 seemed to understand the relationship between creditor and debtor and that a creditor is motivated to cease a foreclosure if the debtor satisfies the debt (or past due amounts), performs other loss mitigation, or if the creditor simply does not have the evidence to proceed.  As such, they seemed to intentionally relax the Rules of Evidence and the Rules of Civil Procedure for non-judicial foreclosures.  The issue of res judicata has been a topic of debate in North Carolina foreclosure law. (See generally In Re Rogers Townsend & Thomas, PC, 794 S.E.2d 484 (2016); U.S. Bank Nat. Ass’n v. Pinkney, 787 S.E.2d 464 (2016); In re Garvey, 772 S.E.2d 747 (2015); Lifestore Bank v. Mingo Tribal Preservation Trust, 763 S.E.2d 6, 235 N.C. App 573 (2014)).  The North Carolina Supreme Court’s holdings in In Re Lucks effectively puts an end to these debates.  The Court effectively summarized its position in the following two sentences: “Non-judicial foreclosure is not a judicial action; the Rules of Civil Procedure and traditional doctrines of res judicata and collateral estoppel applicable to judicial actions do not apply. To the extent that prior case law implies otherwise, such cases are hereby overruled.” In Re Lucks, 369 N.C. at 229, 794 S.E.2d at 507.

[1] According to the witness at trial, Duetsche Bank typically recorded all power of attorneys in Mecklenburg County; however, this particular power of attorney was recorded in Montgomery County Register of Deeds.