Power-of-sale foreclosure, deficiency defenses, surplus, registration of conveyances, and seller disclosure (North Carolina statutes)

Black-letter propositions

1. 01

   A mortgagee or trustee who seeks to exercise a power of sale must file a notice of hearing with the clerk of court, serve it on each party entitled to notice not less than 10 days before the hearing, and by statute may serve by posting on the property not less than 20 days before the hearing where service cannot otherwise be made.

2. 02

   The notice must describe the security interest being foreclosed, name the holder, state the nature of the default and any acceleration, state any right to pay or cure, and include a statement that to authorize the foreclosure the clerk must find a valid debt of which the party seeking to foreclose is the holder, default, a right to foreclose under the instrument, and notice to those entitled to notice.

3. 03

   The proceeds of a foreclosure sale are applied in order to the costs and expenses of the sale, unpaid taxes, unpaid special assessments, and the obligation secured by the mortgage or deed of trust.

4. 04

   Any surplus after applying the proceeds must be paid to the persons entitled to it if the seller knows who they are, and otherwise to the clerk of superior court when the owner is dead with no personal representative, the persons cannot be located, the seller is in doubt, or adverse claims are asserted.

5. 05

   When a mortgagee, payee, or holder buys at a foreclosure sale and then sues for a deficiency, the mortgagor may show as a defense and offset, but not as a counterclaim, that the property was fairly worth the amount of the debt at the time and place of sale or that the amount bid was substantially less than its true value.

6. 06

   That deficiency defense does not apply to foreclosure sales made under a court order or decree, and it does not affect the rights of other purchasers or innocent third parties.

7. 07

   A mortgagee or trustee under a mortgage or deed of trust that secures the balance of the purchase price of real property, and that shows on its face that it is for purchase money, is not entitled to a deficiency judgment.

8. 08

   A register of deeds may not accept for registration an instrument that requires acknowledgment or proof unless its execution appears to have been proved or acknowledged before an officer with apparent authority, so an unacknowledged instrument is not properly registered.

9. 09

   No conveyance of land, contract to convey, option, lease for more than three years, right of first refusal, or right of first offer is valid to pass a property interest as against lien creditors or purchasers for valuable consideration except from the time of its registration, and instruments have priority by order of registration.

10. 10

    Where a seller of a home knows of facts materially affecting its value that are not readily observable and not known to the buyer, the seller has a duty to disclose them, and concealment of a roof leak entitled the buyers to rescission and return of their deposit.

Use this attack sequence under time

Common wrong turns

• A purchase-money mortgagee gets no deficiency judgment even after a foreclosure sale.
• The deficiency defense is raised as a defense and offset and not as a counterclaim.
• An unregistered conveyance does not bind lien creditors or purchasers for value, whatever they knew, under the North Carolina registration statute.
• A seller's silence about a known hidden defect can support rescission.

Worked example

A lender holding a deed of trust forecloses, buys the property at the sale for far less than its value, and sues the borrower for the balance. The deed of trust secured a loan for the borrower's refinancing and not for the purchase price.

Practice this topic

Notice, hearing, and sale proceeds

North Carolina General Statutes section 45-21.16 requires the mortgagee or trustee to file a notice of hearing with the clerk of court and serve it not less than 10 days before the hearing on each party entitled to notice, allows service by posting not less than 20 days before the hearing in the circumstances the statute describes, and requires the notice to include a statement that to authorize foreclosure the clerk must find the existence of a valid debt of which the party seeking to foreclose is the holder, default, a right to foreclose under the instrument, and notice to those entitled to notice.

Section 45-21.31 requires proceeds of sale to be applied to the costs of sale, unpaid taxes, unpaid special assessments, and the secured obligation, and requires any surplus to be paid to those entitled to it, or to the clerk when the owner is dead with no personal representative, the persons cannot be located, the seller is in doubt, or adverse claims are asserted.

Deficiency rules

Section 45-21.36 lets a mortgagor sued for a deficiency by a mortgagee who bought at the foreclosure sale prove as a defense and offset, but not as a counterclaim, that the property was fairly worth the debt at the time and place of sale or that the bid was substantially less than its true value, and it does not apply to court-ordered foreclosure sales. Section 45-21.38 bars a deficiency judgment where the mortgage or deed of trust secures the balance of the purchase price of real property and shows so on its face.

Registration and disclosure

Section 47-14 provides that a register of deeds shall not accept for registration an instrument that requires proof or acknowledgment unless it appears to have been proved or acknowledged before an officer with apparent authority, and section 47-18 provides that no conveyance of land, contract to convey, option, lease for more than three years, right of first refusal, or right of first offer is valid to pass a property interest as against lien creditors or purchasers for valuable consideration except from the time of its registration.

Johnson v. Davis held that where the seller of a home knows of facts materially affecting the value of the property that are not readily observable and not known to the buyer, the seller must disclose them, that the duty applies to all forms of real property, and that the sellers' concealment of known roof problems entitled the buyers to the return of their deposit.

Frequently asked questions