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Falk v. Mae

Supreme Court of North Carolina

December 19, 2014

MICHAEL A. FALK, as Trustee of the Trust dated 10-26-1989 having the Tax ID Number 65-6043718 (a/k/a " The Charlotte Falk Irrevocable Trust" )
v.
FANNIE MAE (a/k/a FEDERAL NATIONAL MORTGAGE ASSOCIATION); GLASSRATNER MANAGEMENT & REALTY ADVISORS, LLC; IDELL FLOURNEY; SONYA PETIT; LIBA MEIERE; SHAWNEQUA DODSON; ADOLFO ZARATE; TISHAUN WHITEHEAD; and JOHN DOES #1 - #160, BEING THE UNIDENTIFIED LESSEES OF THE APARTMENT UNITS AT THE PROPERTY KNOWN AS " RIDGEWOOD APARTMENTS" ; FANNIE MAE (a/k/a FEDERAL NATIONAL MORTGAGE ASSOCIATION), Third-Party Plaintiff
v.
MICHAEL A. FALK, as Trustee of the Trust dated 10-26-1989 having the Tax ID Number 65-6043718 (a/k/a " The Charlotte Falk Irrevocable Trust" ) and QUICKSILVER, LLC, Third-Party Defendants

Heard, October 6, 2014

Counsel Amended January 7, 2015.

Page 272

N.C. Court of Appeals. No. 12-764. Douglas McCullough, Judge.

Rossabi Black Slaughter, P.A., Greensboro, NC by Gavin J. ReardonMr. and Amiel J. RossabiMr., Primary Attorneys, Attorneys at Law, for 3rd Party-Appellee - Falk, Michael A. (As Trustee), et al.

CARRUTHERS & ROTH, PA, Greensboro, NC by Rachel Scott DeckerMs., Primary Attorney, Attorney at Law, J. Patrick HaywoodMr., Attorney at Law, for 3rd Party-Appellant - Fannie Mae, et al.

Horack, Talley, Pharr & Lowndes, P.A., Charlotte, NC, by Zipporah Basile EdwardsMs., Primary Attorney, Attorney at Law, Mr. Robert B. McNeill, Attorney at Law, for Plaintiff-Appellant - Fannie Mae.

OPINION

Page 273

On discretionary review pursuant to N.C.G.S. § 7A-31 and on appeal of right of a constitutional question pursuant to N.C.G.S. § 7A-30(1) to review a unanimous decision of the Court of Appeals, __ N.C.App. __, 738 S.E.2d 404 (2013), reversing and remanding an order entered on 9 March 2012 by Judge Lindsay R. Davis, Jr. in Superior Court, Guilford County. Heard in the Supreme Court on 6 October 2014.

[367 N.C. 595] HUNTER, Justice.

The case before us involves a dispute between Michael Falk, Trustee of the Charlotte Falk Irrevocable Trust (Trust), and the Federal National Mortgage Association (Fannie Mae), concerning which party's mortgage lien on the Ridgewood Apartments, located in Guilford County, has priority status. The solution to the dispute involves application of our State's " life of lien" statute, N.C.G.S. § 45-37(b).[1]

Subsection 45-37(b) establishes a conclusive presumption that the conditions of prior liens are satisfied after fifteen years from the later of either of two dates: the date on which the instrument requires performance, or the date of maturity of the last installment of debt (maturity date). Because in Smith v. Davis, 228 N.C. 172, 45 S.E.2d 51 (1947), this Court established that the 1923 version of this statute did not apply the presumption to lienholders who acquired and recorded their liens before the expiration of senior mortgage indebtedness, the Court of Appeals applied that interpretation to the current version of the statute. We hold this application was erroneous because the unique legislative language in the 1923 Act was not present in subsequent revisions of the life of lien statute. We conclude therefore that the General Assembly did not intend to continue this limitation and that the limitation did apply to the transactions in this case. N.C.G.S. § 45-37(b) authorizes a senior lienholder to extend the " life of the lien" by filing an affidavit with the register of deeds containing the information required by the statute. We hold that, absent the filing of such an affidavit, N.C.G.S. § 45-37(b) allows a court to conclusively presume that prior liens are satisfied irrespective of whether a subsequent lienholder obtained its interest before or after expiration of [367 N.C. 596] the fifteen year period from the maturity date. Accordingly, we reverse the decision of the Court of Appeals.

Ridgewood Apartments (the property) consists of a number of tracts containing apartments for rent. In 1992 Michael Falk and his son Harry Falk, as shareholder-directors of Quicksilver Corporation, purchased the property for $5,200,000. The Falks subsequently converted Quicksilver Corporation into Quicksilver, LLC (Quicksilver) and became the sole member-managers. On 27 October 1994, Quicksilver acquired the property by deed and on the following day, 28 October, secured the payment with a promissory note (Trust Note) in the amount of $600,000 and a deed of trust (Trust Deed) " to evidence a debt incurred for the purchase of [the property]" in 1992. The Trust Note established a 14% per annum interest rate in the event of default. The Trust Deed was recorded in Guilford County on 30 December 1994.

In December 1994, Michael Falk issued an oral demand on behalf of the Trust to Quicksilver for partial payments on the loan.[2] The Trust contends that Quicksilver's failure to make payments placed Quicksilver in default, thus triggering the 14% default interest rate as specified in the Trust Note. Despite several partial payments to the Trust in later years, the Trust contends Quicksilver never cured the default, and the Trust Note has accrued interest at the default rate since 1995.

In 1999 Wachovia Bank, N.A. (Wachovia) loaned funds to Quicksilver to make improvements

Page 274

to the property. To fulfill a condition Wachovia imposed on its loan to Quicksilver, Michael Falk and a Co-Trustee signed an agreement subordinating the Trust's interest in the property to Wachovia. This subordination agreement was recorded on 15 March 2000. Wachovia secured its loan through a Deed of Trust, Assignment of Rents, and Security Agreement and Financing Statement (Wachovia Deed) encumbering the property. The Wachovia Deed was recorded in Guilford County on 7 July 1999.

To obtain a better interest rate, Quicksilver refinanced the Wachovia loan with funds from Lend Lease Mortgage Capital, L.P. (Lend Lease). To secure this loan, on 14 May 2001, Quicksilver executed and recorded a Multifamily Note secured by a Multifamily Deed of Trust, Assignment of Rents, and Security Agreement encumbering the property. Although the original deed of trust to the Trust was still [367 N.C. 597] of record, no subordination agreement was signed for this transaction. The Wachovia Note and Deed of Trust were satisfied of record. Subsequently, Lend Lease sold and assigned its Note and Deed of Trust to Fannie Mae (hereinafter the FNMA Note and FNMA Deed).

Quicksilver subsequently defaulted on the FNMA Note and Fannie Mae foreclosed on the property in 2011. Fannie Mae was the highest bidder at the foreclosure sale and received a Trustee's Deed for the property dated 2 August 2011. Following Fannie Mae's foreclosure, Mr. Falk's counsel sent a letter to Fannie Mae stating that the Trust held a superior lien on the property and demanding immediate payment of $3,525,977.05 to cover the principal and interest owing under the Trust Note.

After Fannie Mae refused to pay the amount demanded, the Trust filed a verified complaint in Superior Court, Guilford County, against Fannie Mae and others seeking both a declaratory judgment that the Trust Deed was a " valid and enforceable lien" and an injunction to prevent Fannie Mae from collecting rents from residents of the property. In a separate action, the Trust sought to foreclose upon the property under its Trust Deed. After a foreclosure hearing before an assistant clerk of superior court, the assistant clerk filed findings of fact and an order permitting the Trust to proceed with foreclosure on the property.

Fannie Mae appealed the foreclosure order and findings of fact to the superior court. Fannie Mae also filed an answer to the Trust's verified complaint, a counterclaim and third-party complaint, and motions seeking a temporary restraining order and preliminary injunction to stop the foreclosure action. The superior court granted Fannie Mae's motion for a temporary restraining order and scheduled a hearing on all other matters for January 2012. Before the hearing date, Fannie Mae and Mr. Falk filed cross motions for summary judgment.

The matter was heard during the 17 January 2012 civil session of Superior Court, Guilford County. At the hearing, the Trust argued that the Trust Deed was valid and enforceable and entitled it to foreclose upon the property because of Quicksilver's default under the Trust Note. Fannie Mae argued, inter alia, that the Trust's lien had expired by operation of law and, in the alternative, that the FNMA Deed was superior to the Trust Deed " pursuant to subrogation." The trial court granted Fannie Mae's motion for summary judgment, ruling that the version of N.C.G.S. § 45-37(b) in effect when the Trust Note matured on 28 October 1994 operated to terminate the Trust's lien on the property no later than 28 October 2009. See N.C.G.S. § 45-37(b) (1991). ...


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