In Re the Foreclosure of the Deed of Trust of Vogler Realty, Inc.

703 S.E.2d 159, 208 N.C. App. 212, 2010 N.C. App. LEXIS 2416

• Court: Court of Appeals of North Carolina
• Decided: December 7, 2010
• Docket: COA09-1714
• Status: Published

Opinions

McGEE, Judge.

Charles N. Stedman (the Trustee) was trustee on a deed of trust executed by Vogler Realty, Inc. (the Mortgagor-Grantor) and J.B. Lee & Company, to a parcel of land in Burlington. The Trustee, acting both as Trustee and the Trustee’s Attorney, filed a foreclosure proceeding under power of sale as set forth in the deed of trust, on 20 March 2009. The Alamance County Clerk of Superior Court (the Clerk) conducted a hearing at which the Mortgagor-Grantor appeared, admitted its default, and did not contest the foreclosure. The Clerk entered an order authorizing the Trustee to proceed with the foreclosure sale. After the sale was completed, the Trustee filed a Final Report and Account of Foreclosure Sale (the Final Report), for audit and approval, dated 26 June 2009. In the Final Report, the Trustee noted, inter alia, the following disbursements to himself: (1) “Trustee’s Commission” in the amount of $16,813.12; and (2) “Attorney’s Fee” in the amount of $33,573.82.

At the time of the sale, CommunityOne Bank, N.A. (the Bank) was a junior lienholder on the real property secured by the deed of trust. The Bank filed a “motion and objection to disbursements pursuant to the final report and account of foreclosure” on 13 July 2009. The Bank argued that the Trustee’s Final Report authorized a disbursement of additional attorney’s fees beyond that which was justified, and that the Trustee failed to properly support the amount of the attorney’s fees. The Clerk entered an order on 27 July 2009, disapproving the Final Report and ordering the following:

1. The proposed Final Report and Account of Foreclosure Sale dated June 26, 2009 and showing a Trustee’s Commission payable to the Trustee/Attomey in the amount of Sixteen Thousand Eight Hundred Thirteen Dollars and Twelve Cents ($16,813.12) and Attorney’s fees payable to the Trustee/ Attorney in the amount of Thirty-Three Thousand Five Hundred Seventy-Three Dollars and Eighty Two Cents ($33,573.82) is not approved.

2. Within thirty (30) days of the docketing of this Order, Trustee/Attorney Charles N. Stedman is to prepare an Amended Final Report and Account of Foreclosure Sale reflecting receipt of Sixteen Thousand Eight Hundred Thirteen Dollars and Twelve Cents ($16, 813.12), being the Trustee’s Commission of Five Percent (5%), plus additional attorney’s fees in the amount of Four Thousand Seven Hundred Twenty Six Dollars and Eighty Eight Cents ($4,726.88), to be shown on separate lines of the amended Final Report and Account of Foreclosure Sale.

3. The Amended Final Report and Account of Foreclosure Sale shall be submitted to the Clerk of Superior Court for review, audit, and recording within thirty (30) days of the docketing of this Order, unless this Order is appealed to Alamance County Superior Court.

The Trustee appealed the Clerk’s 27 July 2009 order to the superior court which, in an order entered 4 November 2009, “affirm[ed] the Clerk’s Order, in its entirety.” The Trustee appeals.

The Trustee first argues that the trial court erred in affirming the Clerk’s order because neither the superior court nor the Clerk had authority to make determinations of reasonableness when auditing the Trustee’s Final Report. We agree.

N.C. Gen. Stat. § 45-21.31(a) sets forth the procedure for distributing the proceeds of a sale from a foreclosure action:

The proceeds of any sale shall be applied by the person making the sale, in the following order, to the payment of—

(1) Costs and expenses of the sale, including the trustee’s commission, if any, and a reasonable auctioneer’s fee if such expense has been incurred;

(2) Taxes due and unpaid on the property sold, as provided by G.S. 105-385, unless the notice of sale provided that the property be sold subject to taxes thereon and the property was so sold;

(3) Special assessments, or any installments thereof, against the property sold, which are due and unpaid, as provided by G.S. 105-385, unless the notice of sale provided that the property be sold subject to special assessments thereon and the property was so sold;

(4) The obligation secured by the mortgage, deed of trust or conditional sale contract.

N.C. Gen. Stat. § 45-21.31(a) (2009). Likewise, N.C. Gen. Stat. § 45-21.33 provides for a: “Final report of sale of real property” and an audit by the clerk of superior court, as follows:

(a) A person who holds a sale of real property pursuant to a power of sale shall file with the clerk of the superior court of the county where the sale is held a final report and account of his receipts and disbursements within 30 days after the receipt of the proceeds of such sale. Such report shall show whether the property was sold as a whole or in parts and whether all of the property was sold. The report shall also show whether all or only a part of the obligation was satisfied with respect to which the power of sale of property was exercised.

(b) The clerk shall audit the account and record it.

N.C. Gen. Stat. § 45-21.33 (2009).

In In re Foreclosure of Ferrell Brothers Farms, our Court addressed the scope of the statutory authority granted to the clerk of superior court when conducting an audit pursuant to N.C.G.S. § 45-21.33. Ferrell, 118 N.C. App. 458, 455 S.E.2d 676 (1995). In Ferrell, we reviewed the trial court’s order granting the trustee in a foreclosure proceeding a trustee’s commission, as well as allowing the payment of the trustee’s attorneys’ fees. Id. at 459, 455 S.E.2d at 677. After the sale, the holder of a second mortgage filed notice with the trial court, claiming ownership of any surplus funds from the foreclosure sale. Id. The trustee and the trustee’s attorneys filed motions with the trial court to allow the commission and attorneys’ fees, while the second mortgagee moved “to limit” the attorneys’ fees and the trustee’s commission. Id. The trial court conducted a hearing but did not allow the second mortgagee to present evidence as to the reasonableness of the commission and attorneys’ fees. Id. The trial court determined that the requested commission and attorneys’ fees were reasonable and that the trustee and attorneys were entitled to those disbursements. Id.

Our Court stated that the issue for review was “whether a trustee conducting a sale of real property pursuant to an express power of sale contained in a mortgage or deed of trust is required to receive court approval of the amount of disbursements made pursuant to N.C. Gen. Stat. § 45-21.31(a).” Id. “The only question is whether the legislature has provided or whether the instrument provides any means for [the second mortgagee] to contest the amount of disbursements made by the trustee. The answer is no." Id. at 460, 455 S.E.2d at 677-78 (emphasis added).

In reviewing the relevant law, our Court noted that: “The trustee is entitled to compensation ‘as is stipulated in the instrument,’ . . . [and] [although N.C. Gen. Stat. § 45-21.31(a) does not have specific reference to attorneys’ fees, to the extent the instrument provides for the payment of such fees, they become an ‘obligation secured by’ the instrument.” Id. at 460-61, 455 S.E.2d at 677. We therefore recognized that “any entitlement to and the amount of attorneys’ fees required for the conduct of the sale is also controlled by the instrument and subject to deduction from the sale proceeds.” Id. at 461, 455 S.E.2d at 677.

Our Court then addressed the issue of whether the trustee was required to seek approval of the amount of disbursements:

Chapter 45, Article 2A contains no language that suggests the trustee must seek or obtain approval from either the clerk of the superior court or the court prior to making the disbursements permitted in N.C. Gen. Stat. § 45-21.31(a). . . . Thus, in this case, the disbursements made pursuant to N.C. Gen. Stat. § 45-21.31(a) are within the sole province of the trustee. The trustee is required to file a final report and that report must be audited by the clerk of the superior court. In conducting the “audit,” however, the clerk is merely authorized to determine whether the entries in the report reflect the actual receipts and disbursements made by the trustee..

Accordingly, the trial court did not err in refusing to allow [the second mortgagee] to present evidence on the reasonableness of the trustee’s commission and attorneys’ fees. Indeed, the reasonableness of these expenses was not an issue properly before the trial court.

Id., 455 S.E.2d at 678 (emphasis added). Thus, we held in Ferrell that a clerk of superior court, conducting an audit of a final report and account of sale pursuant to N.C.G.S. § 45-21.33, lacks the statutory authority to make determinations of the reasonableness of expenses listed on the report. Id.

Our Court revisited this issue in In re Foreclosure of Webber, 148 N.C. App. 158, 557 S.E.2d 645 (2001). In Webber, the trustee sought pre-approval from the clerk of superior court of certain costs, expenses, and obligations related to a foreclosure sale. Id. at 158-59, 557 S.E.2d at 645. The trustee allocated a payment of “$12,000.00 in legal fees.” Id. at 160, 557 S.E.2d at 646. The mortgagees objected to certain of the proposed payments, and the clerk of superior court conducted a hearing. Id. at 159-60, 557 S.E.2d at 645-46. The clerk entered judgment disapproving the amount of attorney’s fees and reducing them, which was appealed to the superior court. Id. at 160, 557 S.E.2d at 646. The superior court ruled, inter alia, that it had jurisdiction to conduct de novo review of the clerk’s order; that the clerk did not exceed his authority in entering the order; and that the amount of attorney’s fees should be increased in part. Id. The trustee and the mortgagors appealed. Id. On appeal to our Court, we noted that

within the context of a foreclosure proceeding pursuant to Chapter 45, Article 2A, the legislature has not provided any means for a party to contest payments made by a trustee pursuant to [N.C.G.S. § 45-21.31] subsection (a), and that disputes regarding such payments are not issues properly before the clerk of superior court or the superior court as a part of a foreclosure proceeding.

Id. at 161, 557 S.E.2d at 647 (citing Ferrell, 118 N.C. App. at 461, 455 S.E.2d at 678). Our Court then held that the trustee’s attorney’s fees fell “within the costs, expenses, and other obligations listed in subsection (a) of N.C. Gen. Stat. § 45-21.31.” Id. at 162, 557 S.E.2d at 647. Therefore, the trustee’s proposed payments of attorney’s fees were “ ‘within the sole province of the trustee.’ ” Id. (quoting Ferrell, 118 N.C. at 461, 455 S.E.2d at 678). Finally, our Court held that

neither the clerk of superior court nor the superior court had statutory authority under Chapter 45, Article 2A, to review the trustee’s proposed application of the proceeds of the foreclosure sale, or to allow, disallow, or modify the amount of such proposed payments, or to rule on whether the trustee had breached his fiduciary duties.

Webber, 148 N.C. App. at 162, 577 S.E.2d at 647-48.

In the case before us, we find Ferrell and Webber controlling. The facts in the present case show that the Trustee conducted a foreclosure sale under a deed of trust containing a power of sale pursuant to Chapter 45, Article 2A of the General Statutes. The Trustee filed a Final Report pursuant to N.C.G.S. § 45-21.33, dated 26 June 2009. In the Final Report, pursuant to N.C. Gen. Stat. § 45-21.31, the Trustee set forth several items, including the distribution of the proceeds of the sale. As stated in Ferrell, “any entitlement to and the amount of attorneys’ fees required for the conduct of the sale is also controlled by the instrument and subject to deduction from the sale proceeds.” Ferrell, 118 N.C. App. at 461, 455 S.E.2d at 677-78. The deed of trust in the case before us specifically provides that the Trustee may “retain an attorney to represent him in such proceedings [under power of sale] . . . [and that] [t]he proceeds of the Sale shall[,] after the trustee retains his commission, together with reasonable attorneys fees incurred by the Trustee in such proceeding, be applied to the costs of sale[.]” Thus, the Trustee’s payment of attorney’s fees and his own compensation fall within the “costs, expenses, and other obligations listed in subsection (a)” of N.C.G.S. § 45-21.31, and were “ ‘within the sole province of the trustee.’ ” Webber, 148 N.C. App. at 162, 557 S.E.2d at 647 (quoting Ferrell, 118 N.C. App. at 461, 455 S.E.2d at 678).

The Bank argued in its motion and objection to disbursements in the Final Report, and in its brief, that the Trustee’s payment of additional attorney’s fees to himself, as attorney for the Trustee, was prohibited by N.C. Gen. Stat. § 32-61 and by our Court’s holding in In re Foreclosure of Newcomb, 112 N.C. App. 67, 434 S.E.2d 648 (1993). The Bank also relies on language from the North Carolina Clerk of Superior Court Procedures Manual, which states that: “Except in unusual circumstances, there is no authority to justify receipt by a trustee/attorney of both a trustee’s fee and a separate attorney fee for a foreclosure under power of sale contained in a deed of trust.” School of Government, University of North Carolina at Chapel Hill 2003 at 130.5. The Bank also refers us to the Corpus Juris Secundum. However, neither Corpus Juris Secundum nor the Procedures Manual are binding authority on this Court, whereas the North Carolina General Statutes and prior case law of our Court are.

. In Newcomb, our Court addressed the clerk of superior court’s authority, under former N.C. Gen. Stat. § 32-51, to review the reasonableness of an attorney-trustee’s payment to himself of attorney’s fees incurred during an incomplete foreclosure sale that was terminated pursuant to N.C. Gen. Stat. § 45-21.20. Newcomb, 112 N.C. App. 67, 434 S.E.2d 648. We note that the current N.C.G.S. § 32-61 contains substantially the same provisions as in the former N.C.G.S. § 32-51. N.C. Gen. Stat. § 32-61 provides that:

The clerk of superior court may exercise discretion to allow counsel fees to an attorney serving as a fiduciary or trustee (in addition to the compensation allowed to the attorney as a fiduciary or trustee) where the attorney, on behalf of the trust or fiduciary relationship, renders professional services as an attorney that are different from the services normally performed by a fiduciary or trustee and of a type which would reasonably justify the retention of legal counsel by a fiduciary or trustee who is not licensed to practice law.

N.C. Gen. Stat. § 32-61 (2009).

In Newcomb, the trustee-attorney initiated a foreclosure sale, but the mortgagor decided to satisfy the outstanding debt prior to completion of the sale pursuant to N.C. Gen. Stat. § 45-21.20. Newcomb, 112 N.C. App. at 69, 434 S.E.2d at 649. The trustee-attorney agreed to the arrangement proposed by the mortgagor, but “insisted upon a commission of $10,000.00 to accomplish termination of the power of sale[.]” Id. Eventually, the property was sold by the mortgagor through a private sale pursuant to N.C.G.S. § 45-21.20, and the trustee-attorney and the mortgagor brought the issue of the $10,000.00 commission before the clerk of superior court. Id. The clerk ordered $10,000.00 to be paid to the trustee-attorney as a commission. Id. The superior court affirmed, ruling that the trustee-attorney was entitled to the $10,000.00 as “both commission and compensation for legal services.” Id. at 72, 434 S.E.2d at 651 (emphasis in the original).

Citing former N.C.G.S. § 32-51, our Court in Newcomb held:

When a trustee of a deed of trust who is also a licensed attorney performs such extraordinary services as described in [former N.C.G.S. § 32-51] in connection with a foreclosure proceeding, . . . counsel is entitled under [N.C.]G.S. § 45-21.20 to an award of attorney’s fees as an “expense [] incurred with respect to the sale or proposed sale . . . .”

Id. However, we noted that “[i]n passing on the allowance of attorney’s fees pursuant to statutory authority . . . our appellate courts have consistently held a trial court’s order ‘must contain a finding or findings upon which a determination of the reasonableness of the award can be based[.]’ ” Id. (citation omitted). Our Court then reviewed the record and concluded that the “findings of fact and conclusions of law [did] not support the amount of attorneys’ fees awarded as ‘legal expenses].]’ ” Id. at 74, 434 S.E.2d at 652.

Thus, as the Bank contends, Newcomb did recognize the role of the clerk in evaluating the reasonableness of an attorney-trustee’s payment of fees to himself. However, the Bank’s reliance on Newcomb is misplaced with respect to its argument that the clerk may review a trustee-attorney’s payment of fees when auditing a final report. Newcomb, and its application of N.C.G.S. § 32-51, dealt solely with a foreclosure sale that was incomplete and terminated pursuant to N.C.G.S. § 45-21.20, which is a different context than that which faces us now.

In contrast, our Court in Ferrell and Webber dealt with cases where the trustee completed the foreclosure sale and filed a final report pursuant to N.C.G.S. § 45-21.33. Neither Ferrell nor Webber discussed the applicability of N.C.G.S. § 32-51 to a clerk’s audit of a final report pursuant to N.C.G.S. § 45-21.33. The proceeding in the case before us arose from the Bank’s objections to the Trustee’s Final Report pursuant to N.C.G.S. § 45-21.33, and thus Ferrell and Webber, rather than Newcomb, are controlling. Under N.C.G.S. § 45-21.33, the clerk “is merely authorized to determine whether the entries in the report reflect the actual receipts and disbursements made by the trustee.” Ferrell, 118 N.C. App. at 461, 455 S.E.2d at 678.

The dissenting opinion contends that Newcomb is not limited to proceedings where a sale was terminated pursuant to N.C.G.S. § 45- 21.20. The dissent also maintains that there is an existing conflict between Newcomb, Ferrell, and Webber and questions the role of our Court in resolving that perceived conflict. Although we do not disagree that the holding in Newcomb is not expressly limited to circumstances involving N.C.G.S. § 45-21.20, we find that Newcomb is clearly distinguishable from Webber, Ferrell, and the present case because of the focus in Webber and Ferrell of the authority of a clerk regarding' an audit of a final report and account of sale pursuant to N.C.G.S. § 45-21.33. In making this distinction, our interpretation of Webber and Ferrell reconciles the holdings in those two cases with that of Newcomb and is most applicable to the procedural posture in the case before us.

Our Court provided further guidance in Webber, stating:

We suggest that the proper procedure, as contemplated by Chapter 45, Article 2A, was for the trustee to have: (1) made all payments pursuant to subsection (a) of N.C. Gen. Stat. § 45-21.31 as he deemed proper in his discretion; (2) either paid the surplus to the persons entitled thereto, or paid the surplus to the clerk if there were any dispute as to who was entitled thereto, pursuant to N.C. Gen. Stat. § 45-21.31(b); and (3) filed a final report and account with the clerk pursuant to N.C. Gen. Stat. § 45-21.33. We note that a party wishing to challenge payments made pursuant to N.C. Gen. Stat. § 45-21.31(a) may do so in a separate proceeding against the trustee for a breach of fiduciary duty once such payments have been made. See Sloop v. London, 27 N.C. App. 516, 219 S.E.2d 502 (1975) (action for wrongful foreclosure alleging, in part, breach of fiduciary duty by trustee).

Id. at 162-63, 577 S.E.2d at 648. In the case before us, the Bank challenged payments listed in the Final Report made pursuant to N.C.G.S. § 45-21.33. The “proper procedure,” as set forth in Webber, would have been for the Trustee to make payments as he deemed proper under N.C.G.S. § 45-21.31 (a) and (b), and then to file his Final Report. The Clerk should have audited the Final Report solely to determine whether the payments were made as reflected in the Final Report. Thereafter, if the Bank wished “to challenge payments made pursuant to N.C. Gen. Stat. § 45-21.31(a)[,] [it could] do so in a separate proceeding against the [T]rustee for a breach of fiduciary duty once such payments [had] been made.” Webber, 148 N.C. App. at 163, 557 S.E.2d at 648. The “proper procedure” suggested by Webber focuses on the correctness of the foreclosure proceeding itself. Nothing in our holding affects the right of an aggrieved party to challenge the actions of a trustee in a separate action against the trustee focused on the propriety of the trustee’s actions, just not by motion filed at the time of the audit where the clerk is without authority to resolve such matters.

Because the Clerk lacked statutory authority to assess the reasonableness of the payments set out in the Trustee’s Final Report, the Clerk’s order must be vacated. Id. We therefore vacate the Clerk’s order and the trial court’s order affirming it. In light of our ruling, we need not address the Trustee’s remaining arguments.

Vacated.

Judge STROUD concurs. Judge HUNTER, JR. dissents with a separate opinion.