In re Foreclosure of Deed of Trust Recorded in Book 911

272 S.E.2d 893, 50 N.C. App. 69, 1980 N.C. App. LEXIS 3460

• Court: Court of Appeals of North Carolina
• Decided: December 16, 1980
• Docket: No. 8025SC309
• Status: Published

Opinions

MORRIS, Chief Judge

The I.R.S. presents the novel question of whether funds generated by the foreclosure and sale of real property pursuant to a power of sale contained in a deed of trust conveying that property retain the characteristics of the underlying property and are thus constructively held by the entirety, or whether the tenancy by the entirety is terminated and the proceeds take on the characteristics of property held by tenants in common. The I.R.S. contends that when real property held by husband and wife as tenants by the entirety is foreclosed and sold pursuant to a power of sale in a deed of trust, the characteristics of the tenancy by the entirety come to an end, and the surplus funds resulting from the sale are held by the husband and wife as tenants in common. Under this theory the I.R.S. contends that through its tax lien against Frank S. Cline, individually, it would be entitled to one-half of the amount remaining of the surplus after payment of the other judgment creditors and lien-holders with chronological priority. This would give the I.R.S. a valid lien and place it before both Northwestern Factors, Inc., and Conover Foam and Fiber Corporation in the line for payment of debts secured by liens on the property.

The distinctive properties and incidents of an estate by the entirety are set forth by Justice Stacy in Davis v. Bass, 188 N.C. 200, 124 S.E. 566 (1924). See also: J. Webster, Real Estate Law in North Carolina § 102, § 114-117 (1971). The tenancy by the entirety had its origin in the common law fiction that the husband and wife represented one entity. By virtue of the right of survivorship, which is the most distinguishing feature of this tenancy, the entire estate is vested in both the husband and wife simultaneously. Each spouse is deemed to be seized of the whole. The husband and wife are two natural persons, but they are treated by the law as one person. Upon the death of either spouse, the survivor automatically takes the entire estate. There is a change in the properties of the legal person holding the estate, but there is no alteration in the properties of the estate held.

It is basic law that neither the individual creditors of the husband nor the individual creditors of the wife can reach entirety property by execution upon a judgment procured against either spouse alone. However, joint creditors of both spouses can procure a judgment against both the husband and wife on a joint obligation, and the judgment will become a lien on land held by them as tenants by the entirety. This is why lenders and creditors so often compel husband and wife to execute obligations as co-makers. Martin v. Lewis, 187 N.C. 473, 122 S.E. 180 (1924); see: Bank v. Corbett, 271 N.C. 444, 156 S.E. 2d 835, (1967); Edwards v. Arnold, 250 N.C. 500, 109 S.E. 2d 205 (1959); J. Webster, Real Estate Law in North Carolina § 115 (1971).

North Carolina has adopted the tenancy by the entirety and all of the incidents and properties appurtenant thereto. The right of survivorship is the single most important characteristic of this manner of holding property. The I.R.S. is asking us in the case sub judice to abolish a significant part of the effectiveness of the right of survivor-ship as it relates to the tenancy by the entirety. This we are not willing to do.

Although North Carolina recognizes the right of husband and wife to hold real property as tenants by the entirety, it does not in general recognize the tenancy by the entirety in personal property. Wilson v. Ervin, 227 N.C. 396, 399, 42 S.E. 2d 468, 470 (1947), and cases cited therein. When husband and wife voluntarily sell and convey real property owned by them as tenants by the entirety, the proceeds of sale are considered personal property. Therefore, the husband and wife are tenants in common with respect to the ownership of the proceeds of the sale. Shore v. Rabon, 251 N.C. 790, 793, 112 S.E. 2d 556, 559 (1960), and cases cited therein; Wilson v. Ervin, supra. Generally, proceeds from a voluntary sale of real property held by the entirety are held by the husband and wife as tenants in common.

The I.R.S. bases its argument upon this rule of law. They contend that a foreclosure sale, like that of the instant case, is a voluntary conversion of realty into personalty. Therefore, the proceeds should be held by tenancy in common. This would give them a right to participate in the disposition of the surplus. The I.R.S. contends that this foreclosure sale pursuant to a power of sale is voluntary because “the Clines jointly and voluntarily executed a deed of trust encumbering the property, and the Clines were in no way legally prevented from paying the debt secured by the deed of trust.”

The above stated rule upon which the I.R.S. relies applies to voluntary but not involuntary conversions of real property held by the entirety. A different rule prevails in North Carolina when the transfer of property held by the entirety is involuntary. The cases hold that the funds received from the involuntary conversion of the underlying real property constructively retain the characteristics of property held by the entirety.

Highway Commission v. Myers, 270 N.C. 258, 154 S.E. 2d 87 (1967), involved an involuntary taking of real property held by the entirety. The North Carolina State Highway Commission, implementing the State’s power of eminent domain, condemned a right of way for highway purposes over a portion of the real property owned by Irvin J. Myers and wife, Sarah V. Myers, as tenants by the entirety. Pursuant to this condemnation the Commission deposited with the Clerk of Superior Court $10,455 as compensation for the land taken.

At the time of this condemnation Irvin J. Myers and his wife were separated, but not divorced. A dispute arose between the estranged couple over the proper disbursement of the proceeds from the condemnation. On appeal from an order of the Superior Court the State Supreme Court considered the question of whether Mrs. Myers was entitled to a distribution of any part of the $10,455 deposit. In his opinion in which he found the deposit was held by the entirety, Justice Bobbitt stated:

Upon the filing of the complaint and the declaration of taking and deposit in court, the title and the right to immediate possession of the portion of the Myers property within the right of way of said project vested in the Commission. G.S. 136-104. Voluntary action by the owner is not involved. The question for decision is whether such involuntary transfer of title effected by the condemnation proceeding operates to destroy or dissolve the estate by the entirety as if the condemned portion of the Myers property had been sold and conveyed by the voluntary joint acts of the owners thereof. Specifically, is the compensation paid by the Commission for the appropriated property constructively real property, owned by husband and wife as tenants by the entirety, or personal property owned in equal shares by husband and wife?

Unless otherwise provided by their joint and voluntary agreement, and in the absence of an absolute divorce, we are of opinion and so decide that such involuntary transfer of title does not destroy or dissolve the estate by the entirety in respect of the appropriated portion of the Myers land, and that the compensation paid by the Commission therefore has the status of real property owned by husband and wife as tenants by the entirety.

270 N.C. at 262, 154 S.E. 2d at 90.

Similarly, in Perry v. Jolly, 259 N.C. 305, 130 S.E. 2d 654 (1963), the North Carolina Supreme Court declared that the proceeds from the sale of real property held by husband and wife constructively retained the characteristics of the real property where the wife was incompetent. The court reasoned that the wife’s disability made the sale of the property involuntary. Therefore, the resulting proceeds were not held by the couple as tenants in common.

In Perry, the petitioner’s wife, Florence Johnson Perry, had previously been adjudged incompetent. Her husband, the petitioner, instituted a special proceeding to have the court authorize the private sale of certain farm land owned by him and his wife as tenants by the entirety. Mrs. Perry’s guardian objected to the sale. However, the sale was carried out and confirmed by the Superior Court. After the entry and approval of this confirmatory decree, W. H. Perry as attorney in fact for the petitioner appealed from the sale alleging among other things that the sale had destroyed the tenancy by the entirety. In answer to this issue the Supreme Court through Justice Higgins stated:

(2) The sale does not destroy or separate the interests of the tenants by the entirety if one of the parties is incompetent. The right of survivorship is transferred to the fund. A divorce will convert tenancy by entirety into a tenancy in common. A voluntary sale will work a conversion of the land into personalty to be held as other personalty. Wilson v. Ervin, 227 N.C. 396, 42 S.E. 2d 468. However to be voluntary, the sale must be made by both husband and wife. Both must be sui juris. If one is incompetent, a sale cannot be the voluntary act of both. When the court finds it necessary for the good of the parties to require a sale, it is necessary that a good title pass to the purchaser. However, the right of survivorship is transferred to the fund to be held in the manner hereinafter discussed.

259 N.C. at 314, 130 S.E. 2d at 661. For cases from other jurisdictions holding that surplus money arising in foreclosure sale of entirety property is constructively entirety property, see 64 A.L.R. 2d 8, 60 (1959). See also In re Castillian Apartments, 281 N.C. 709, 190 S.E. 2d 161 (1972).

The I.R.S. recognizes the import of our decisions with regard to involuntary conversions of entirety property. However, they contend that a foreclosure and sale pursuant to a power of sale in a deed of trust is voluntary. In support of their argument the I.R.S. cites two cases from sister jurisdictions, Nat. Bank & Trust Co. of Norwich v. Richard, 57 App. Div. 2d 156, 393 N.Y.S. 2d 801 (3d Dept. 1977), and Fort Lee Savings & Loan Association v. Li Butti, 55 N.J. 532, 264 A. 2d 33 (1970) rev’g. 106 N.J. Super. 211, 254 A. 2d 804 (App. Div. 1969), both of which hold that surplus money remaining after foreclosure of a mortgage on an estate held by the entirety becomes personal property held by the owners as tenants in common.

In National Bank and Trust Company of Norwich, supra, the New York Supreme Court relied on the prior case of Hawthorne v. Hawthorne, 13 N.Y. 2d 82, 242 N.Y.S. 2d 50, 192 N.E. 2d 20 (1963). Hawthorne heíd that proceeds from a contract of fire insurance covering entirety property, which were payable to husband and wife, were held by them as tenants in common rather than as tenants by the entirety. There is a vital distinction between the facts of Hawthorne and those of the present case.

Hawthorne dealt with the question of the proper distribution of fire insurance proceeds on a building which had been destroyed by fire. This building was situated on land held by husband and wife as tenants by the entirety. The underlying real property itself was never transferred, but remained in the ownership of the husband and wife. Hawthorne did not deal with the proper disposition of the surplus resulting from the foreclosure and sale of the underlying real property. The disputed funds resulted solely from the terms of an insurance contract.

A prior North Carolina case has limited the applicability of the Hawthorne reasoning to cases involving insurance proceeds on buildings when the land itself is never transferred.

In Forsyth County v. Plemmons, 2 N.C. App. 373, 163 S.E. 2d 97 (1968), a dispute arose between a separated husband and wife over the disbursement of fire insurance proceeds resulting from the destruction of a building situate upon land owned by them as tenants by the entirety. This Court held, as did the Hawthorne Court, that the fire insurance proceeds were not the product of an involuntary conversion. Therefore, they were held by the husband and wife as tenants in common. As in Hawthorne, there was no transfer of the underlying real property. In his opinion, Judge Parker was careful to distinguish this result from that which would occur if the disputed fund had arisen from the transfer of the real property rather than from the fire insurance proceeds. Judge Parker stated:

In the present case the insurance proceeds do not result from any transfer of title, voluntary or involuntary. Tfye land is still owned by the husband and wife in exactly the same manner as before the fire. The disputed funds result solely from the terms of the contract of insurance. Under this contract the insurance company, in consideration of the premium paid to it, has assumed specified risks and has agreed to pay money to the parties insured upon the happening of certain events. Such a policy is a personal contract, appertaining to the parties to the contract and not to the thing which is subject to the risk insured against. 29 Amjur., Insurance, § 183, p. 575. Proceeds payable thereunder when an insured loss occurs take the place of the building destroyed only in the sense of being a thing of like value, not necessarily of like ownership.

Forsyth County v. Plemmons, supra, at 375, 164 S.E. 2d at 99.

The distinction drawn by Judge Parker in Plemmons is clearly correct and valid. We cannot agree with the reasoning of the New York Supreme Court in National Bank and Trust Company of Norwich which applied the reasoning of Hawthorne with respect to fire insurance proceeds to the disposition of the surplus resulting from the foreclosure sale of real property.

Nor are we willing to follow Fort Lee Savings & Loan Association v. Li Butti, 55 N.J. 532, 264 A. 2d 33 (1970) rev’g. 106 N.J. Super. 211, 254 A. 2d 804 (App. Div. 1969), relied on by the I.R.S. There the Supreme Court of New Jersey reversed the judgment of the Appellate Division and held that a judgment creditor of a husband was entitled to payment of his judgment out of the surplus monies received upon the foreclosure sale of realty held by husband and wife by the entirety. In so doing the Court reversed a long line of New Jersey cases which had held that surplus funds resulting from a sale under a mortgage foreclosure of realty were deemed not to be converted into personalty, but continued to maintain their classification as realty held by the entirety. See Danes v. Smith, 30 N.J. Super, 292, 104 A. 2d 455 (App.Div. 1954); Vineland Savings & Loan Ass’n. v. Felmey, 12 N.J. Super. 384, 79 A. 2d 714 (Ch. Div. 1950); Morris v. Glaser, 106 N.J. Eq. 585, 151 A. 766 (Ch. 1930); Servis v. Dorn, 76 N.J. Eq. 241, 76 A. 246 (Ch. 1909). The court’s per curiam opinion in Fort Lee Savings and Loan Ass’n. v. Li Butti, 55 N.J. 532, 264 A. 2d 33 (1970), adopted for its reasoning the dissenting opinion of Judge Carton in Fort Lee Savings and Loan Ass’n. v. Li Butti, 106 N.J. Super. 214, 254 A. 2d 804 (App. Div. 1969). As in National Bank and Trust Company of Norwich the chief authority upon which Judge Carton rests his dissent is Hawthorne.

The I.R.S. argues that this foreclosure sale of real property was voluntary because it was pursuant to a power of sale provision which was voluntarily executed by the borrowers. The foreclosure and sale were steps in a process entirely consensual in origin and nature.

Theoretically, the I.R.S.’s argument may have some validity, but, practically, it cannot be said that the execution of a deed of trust with a power of sale provision and the subsequent implementation of that provision by the trustee are anything but involuntary. Typically, a deed of trust securing a note is a form deed which contains somewhere in the fine print the power of sale. Often the power of sale provision is not negotiable, but is a term which must be accepted by individual borrowers seeking a loan. The power of sale provision is placed in deeds of trust executed today, because it is so advantageous to the note holder. It allows the note holder to call upon the trustee to sell the property if default occurs without the necessity of a lawsuit which would be costly in terms of time and expense. The power of sale is simply a speedy and inexpensive way to obtain the equivalent results of a judicial foreclosure. Surely, it is unreasonable to say that borrowers have a choice between executing a deed of trust with a power of sale provision or one without. It is even more unreasonable to say, as does the I.R.S., that the borrowers’ failure to keep up their payments resulting in default and foreclosure is voluntary. The borrowers’ default on their note and the subsequent foreclosure and sale of the realty securing the note are obviously involuntary.

Finally, the I.R.S. argues that the actual wording of the power of sale provision contained in the deed of trust in the present case proves that the parties intended that the surplus proceeds on the occasion of foreclosure were to be held by them as tenants in common. The critical language provides that the surplus proceeds from a foreclosure sale could be paid, “to the Grantors, or either of them, or to their legal representatives.” (Emphasis added.)

The quoted phrase is mere boiler-plate found in the usual form deed of trust. This particular language would have appeared unchanged in the form deed of trust no matter the capacity in which the grantors held the subject property. The language is deliberately worded in the alternative so that it can apply no matter whether the grantors hold the property as tenants in common, tenants by the entirety, or joint tenants.

Further, this language hardly fits the characteristics of the tenancy in common. “In a tenancy in common the tenants ‘hold by several and distinct titles but by unity of possession.’ That is to say, each tenant in common owns a separate undivided interest in the land in his own right and each has an equal right to possession. Unity of possession is the only requisite unity - the tenants own distinct moi-ties in the land.” J. Webster, Real Estate Law in North Carolina § 101 (1971). The language contained in this deed of trust, which is emphasized by the I.R.S., “or either of them”, is inconsistent with this definition of a tenancy in common. The quoted language uses the word “either” which can be interpreted to mean that one or the other of the grantors could be given the entire surplus of a foreclosure sale. A tenancy in common would require that each tenant be entitled only to the share of the surplus proceeds which was proportional to his share of ownership in the real property. Under this quoted language either tenant could receive the whole surplus. Therefore, this language does not indicate that the grantors only intended that any surplus be held by them in common.

North Carolina has adopted the tenancy by the entirety as one method by which husband and wife may hold real property. The tenancy takes its origin from the common law when husband and wife were regarded as one person, and a conveyance to the two persons was regarded in law as a conveyance to one person.

The estate rests upon the doctrine of the unity of person, and, upon the death of one, the whole belongs to the other, not solely by right of survivorship, but also by virtue of the grant which vested the entire estate in each grantee. Long v. Barnes, 87 N.C., 329; Bertles v. Nunan, 92 N.Y., 152. These two individuals, by virtue of their marital relationship, acquire the entire estate, and each is deemed to be seized of the whole, and not of a moiety or any undivided portion thereof. They are seized of the whole, because at common law they were considered but one person; and the estate thus created has never been destroyed or changed by statute in North Carolina. Freeman v. Belfer, 173 N.C., 587. It still possesses here the same properties and incidents as at common law. Bynum v. Wicker, 141 N.C., 95. The act abolishing survivorship in joint tenancies in fee (C.S., 1735) does not apply to tenancies by the entirety. Motley v. Whitemore, 19 N.C., 537. A joint tenancy is distinguished by the four unities of time, title, interest, and possession (Moore v. Trust Co., 178 N.C., p. 124); and it has been held that in tenancies by the entirety, a fifth unity is added to the four common-law unities recognized in joint tenancies, to wit, unity of person. Topping v. Sadler, 50 N.C., 357.

Davis v. Bass, 188 N.C. 200, 203, 124 S.E. 564, 567-68 (1924).

The right of survivorship, one of the most important incidents of the death obtains because the whole estate belongs to the survivor by right of purchase under the original grant, because each tenant was seized of the whole from the beginning, and the tenant who died owned no estate which was descendible or divisable. Neither tenant can sever the union of interest so as to destroy the right of survivorship without the consent of the other. To hold as the I.R.S. contends would effectively destroy the right of survivorship without the consent of either party. This we are not willing to do. We, therefore, hold that the surplus remaining after the foreclosure and sale pursuant to a power of sale in a deed of trust of real property held by husband and wife as tenants by the entirety constructively retains the characteristics of the real property and is held by or for the benefit of the husband and wife as tenants by the entirety.

Affirmed.

Judge Wells concurs. Judge Vaughn dissents.