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North Carolina Court of Appeals Invalidates Foreclosure Despite Finding of Valid Debt in Default

06.23.11

David N. Anthony

John C. Lynch

D. Kyle Deak

In the wake of the ongoing publicity of foreclosure issues throughout the country, a recent decision handed down by the North Carolina Court of Appeals serves as a continuing wake-up call to mortgage lenders and servicers – make sure your house is in order before starting to foreclose in North Carolina. 

On May 3, 2011, the North Carolina Court of Appeals In re Foreclosure of Gilbert, No. COA10-361, ruled that the note holder had not sufficiently proved that it was, in fact, the holder of the note evidencing the debt secured by the property which it was seeking to foreclose, and, in so doing, reversed a trial court order which allowed a foreclosure sale to proceed.

The foreclosure process in North Carolina is a quasi-judicial process which begins with an initial hearing before the Clerk of Court of the respective county in which the property is located. During that hearing, the Clerk is required by statute to find (1) the existence of a debt, (2) a default in payment of that debt, (3) a power of sale under the security instrument, and (4) proper notice given to the parties. Upon those findings, the Clerk will authorize a foreclose sale to take place. If the Clerk’s Order is appealed to the Superior Court, that Court’s de novo hearing is limited to making a determination on the same four issues as the Clerk of Court.

In Gilbert, the borrowers executed an adjustable rate note in the original principal amount of $525,000.00 to refinance an existing mortgage on their home. Two years later, the borrowers ceased making payments on the note and, after unsuccessful attempts to negotiate modification of the loan, a foreclosure proceeding was initiated. During the initial hearing before the Clerk of Court, the borrowers resisted the foreclosure alleging, inter alia, that the lender had not produced sufficient evidence to establish that it was the owner and holder of the note.  Despite the borrowers’ argument, the Clerk permitted the foreclosure to proceed. Upon appeal to the Superior Court, the borrowers again asserted their argument regarding lack of sufficient evidence to establish ownership of the debt.  And, again, despite borrowers’ argument, the Superior Court allowed the foreclosure to proceed.

Having twice been overruled, the borrowers took their case and arguments to the North Carolina Court of Appeals. In its decision, the Court of Appeals found that there was in fact a valid and existing debt, of which the borrowers had defaulted by their failure to make payments when due. Despite this finding, and recognizing that the original note and allonge had been produced at the hearing before the Superior Court, the Court of Appeals found that the note was payable to Deutsche Bank Trust Company Americas as Trustee, not Deutsche Bank Trust Company Americas as Trustee for Residential Accredit Loans, Inc. Series 206-AQ6. And since Deutsche Bank Trust Company Americas as Trustee for Residential Accredit Loans, Inc. Series 206-AQ6 was the purported noteholder seeking to foreclose, it had not produced sufficient evidence that it was the owner and holder of the note. 
           
The Court of Appeals then went on to further disregard two affidavits produced by the noteholder as evidence of its status as owner and holder, finding in each case that there existed questions as to the factual assertions and conclusions within those affidavits, and noting that the Court was troubled that the mortgage sub-servicer, from which the affidavits emanated, had recently been found to have submitted a false affidavit by the same affiant in a federal case.

The Court of Appeals ultimately concluded that “the record is lacking of competent evidence sufficient to support that [Deutsche Bank Trust Company Americas as Trustee for Residential Accredit Loans, Inc. Series 206-AQ6] is the owner and holder” of the note, and reversed the Superior Court’s Order allowing the foreclosure to proceed. 

Over the past year and a half, Troutman Sanders’ Financial Services Litigation team has successfully litigated attempts by borrowers and “anti-foreclosure” advocates to stop or invalidate foreclosures across the country. We can provide valuable advice and analysis to make sure that your pre-foreclosure procedures conform with the terms of the loan documents and the controlling law. We can also provide experienced and efficient legal representation in the event that the validity of a foreclosure sale is challenged in a lawsuit. In today’s litigious climate, this latest decision by the North Carolina Court of Appeals makes it clear that a strong understanding of the specific property and foreclosure laws within each jurisdiction is critical to protecting the interests of financial institutions.

A copy of the court’s opinion is attached here. Please do not hesitate to contact , or if you have questions.
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