Dorean aftermath
Posted: Sun Mar 30, 2008 6:12 pm
All opinions are subject to modification and technical correction prior to official publication in
the North Carolina Reports and North Carolina Court of Appeals Reports. In the event of
discrepancies between the electronic version of an opinion and the print version appearing in the
North Carolina Reports and North Carolina Court of Appeals Reports, the latest print version is
to be considered authoritative.
NO. COA07-362
NORTH CAROLINA COURT OF APPEALS
Filed: 5 February 2008
HOUSEHOLD REALTY CORPORATION and
HSBC MORTGAGE SERVICES INC.,
Plaintiffs,
v . Guilford County
No. 05 CVS 4269
JOYCE EARL DELANCY LAMBETH a/k/a
J.E.D. LAMBETH, individually;
D. SCOTT HEINEMAN and KURT F. JOHNSON,
individually and as Trustees of the
"Lambeth Family Trust," and
FREMONT INVESTMENT & LOAN,
Defendants.
Appeal by Defendant Fremont Investment & Loan from judgment entered 11 September 2006 by
Judge R. Stuart Albright in Guilford County Superior Court. Heard in the Court of Appeals 17
October 2007.
Katten Muchin Rosenman LLP, by Jeffrey C. Grady, Bradley E. Pearce, and Richard L. Farley,
for Plaintiffs-Appellees.
Roberson Haworth & Reese, P.L.L.C., by Alan B. Powell and Christopher C. Finan, for
Defendant-Appellant.
STEPHENS, Judge.
This matter arises out of a fraudulent mortgage elimination scheme participated in by defendant
Joyce Earl Delancy Lambeth ("Lambeth") and orchestrated by defendants Kurt F. Johnson and D.
Scott Heineman, the principals of the Dorean Group. This scheme operated to fraudulently
remove valid deeds of trust and mortgages given to lenders as security for residential loans. The
fraudulentmortgage elimination scheme ultimately victimized both appellant Fremont Investment
& Loan ("Fremont") and appellees Household Realty Corporation and HSBC Mortgage Services,
Inc. (collectively, "Household").
The sole matter before this Court on this appeal involves a priority dispute between Household
and Fremont in connection with deeds of trust in favor of Household and Fremont that were
negatively affected by the fraudulent mortgage elimination scheme.
I. FACTS
Lambeth acquired real property located at 3914 Berkshire Drive, Browns Summit, North
Carolina 27214 ("Lambeth Property") by Special Warranty Deed dated 23 September 1997, and
recorded on 3 October 1997 in the Guilford County Register of Deeds. On or about 18 February
2000, Lambeth executed and delivered to mortgage lender Axiom Financial Services an
adjustable rate note for the principal amount of $400,000.00, and a deed of trust, pledging the
Lambeth Property to secure Lambeth's obligations under the note. The deed of trust was duly
recorded with the Guilford County Register of Deeds on 29 February 2000.
During 2000, Axiom assigned and transferred to Household the note ("Household Note") and the
deed of trust ("Household Deed of Trust"). In connection with the transfer and assignment, two
assignments of Deed of Trust were recorded with the Guilford County Register of Deeds.
A. FACTS RELATED TO THE FRAUDULENT CANCELLATION
On or about 24 March 2004, Lambeth recorded a quitclaim deed with the Guilford County
Register of Deeds. This deed purported to transfer all of Lambeth's rights and interest in the
Lambeth Property to defendants Heineman and Johnson, as Trustees of the "Lambeth Family
Trust." The transfer was made without notice to or the consent of Household.
On or about 23 April 2004, Heineman and Johnson, as the purported Trustees of the Lambeth
Family Trust, mailed Household 38 pages of documents purporting to be part of a "Private
International Remedy Demand Number HMS-042304-JEDL" ("Administrative Demand"). The
Administrative Demand purported to, among other things, create a self-executing agreement
whereby Household automatically appointed Heineman as "attorney-in-fact" for Household, and
authorized Heineman and Johnson to prepare and record all necessary documents for "proper
reconveyance" of the Lambeth Property if Household, within 10 days, did not rebut "point for
point" a so-called "Affidavit of Truth" contained therein. Household did not respond to the
Administrative Demand.
On or about 3 August 2004, the Dorean Group fraudulently cancelled the Household Deed of
Trust by recording fraudulent documents with the Guilford County Register of Deeds. First,
without Household's authorization, the Dorean Group recorded a document captioned
"Substitution of Trustee," representing that Heineman was the "attorney-in-fact" for Household
Mortgage Services, and further purporting to substitute Lambeth as Trustee under the Household
Deed of Trust. Immediately thereafter, theDorean Group fraudulently recorded a so-called "Full
Reconveyance" wherein Heineman, as the purported Trustee for Household under the Household
Deed of Trust, represented that (i) all sums secured by the Household Deed of Trust had been
paid, and (ii) the Household Deed of Trust and the Household Note had been surrendered to the
Trustee for cancellation. Both statements were false. The Full Reconveyance also purported to
reconvey the estate to the Lambeth Family Trust. The Substitution of Trustee and the Full
Reconveyance are hereinafter referred to as the "Unauthorized Cancellation."
B. FACTS RELATING TO THE FREMONT LOAN
On 22 October 2004, four days prior to the date Household learned of the Unauthorized
Cancellation, Lambeth obtained a new loan from Fremont, executing a promissory note in the
amount of $367,000.00 payable to Fremont ("Fremont Note") and executing a deed of trust in
favor of Fremont ("Fremont Deed of Trust"), pledging the Lambeth Property as security for the
Fremont Note.
For reasons which do not appear of record, the Fremont Deed of Trust was not recorded in the
records of the Guilford County Register of Deeds until 28 January 2005. Fremont purportedly
relied on an examination of the records of the Guilford County Register of Deeds, up to and
including 12 September 2004, to determine that the Lambeth Property was unencumbered at the
time Lambeth executed the Fremont Deed of Trust on 22 October 2004. The Unauthorized
Cancellation was included in the documents upon which Fremont relied.
C. FACTS RELATING TO THE PRIORITY DISPUTE ON APPEAL
By Order and Judgment entered 28 August 2006, the General Court of Justice, Superior Court
Division for Guilford County, held that the Household Deed of Trust was fraudulently cancelled
and should be reinstated as a lien on the Lambeth Property. (See footnote 1) The summary
judgment was not appealed. The Judgment and Order did not specify a reinstatement date of the
Household Deed of Trust and, therefore, left the priority issue between the Household Deed of
Trust and the Fremont Deed of Trust to be determined at a subsequent hearing.
On 28 August 2006, the Honorable Stuart Albright presided over the bench trial between
Household and Fremont. On 11 September 2006, Judge Albright entered Judgment in favor of
Household, restoring the Household Deed of Trust as a lien upon the Lambeth Property, effective
from its original recordation date of 29 February 2000. As between the Household Deed of Trust
and the Fremont Deed of Trust, the trial court held the Household Deed of Trust to be a "first-intime
superior lien" against the Lambeth Property. Fremont appeals this Judgment. We affirm.
II. DISCUSSION
Fremont first contends the trial court erred in applying the rule of law discussed in First Fin.
Savings Bank, Inc. v. Sledge, 106 N.C. App. 87, 415 S.E.2d 206 (1992), in determining that
theHousehold Deed of Trust was entitled to priority over the Fremont Deed of Trust. Fremont
argues the trial court should have relied on Monteith v. Welch, 244 N.C. 415, 94 S.E.2d 345
(1956), instead, to reach a ruling in favor of Fremont. We disagree for the following reasons:
The Monteiths were the beneficiaries of a properly recorded deed of trust for which Thomas
Franks was named as trustee. After several years, the underlying property was sold to the
Welches. At the time of the sale, the Monteiths' deed of trust had not been cancelled. The
Welches, aware of the outstanding lien, gave Franks money at closing to pay the Monteiths to
cancel their deed of trust. Although Franks cancelled the Monteiths' deed of trust eight days later,
he never paid the Monteiths. The Monteiths then sued to re-establish their security interest.
Monteith, 244 N.C. 415, 94 S.E.2d 345.
The North Carolina Supreme Court rejected the Welches' argument that they were entitled to rely
on Franks' cancellation of the lien. The Court held that since the Welches had notice of the
Monteiths' senior lien, they did not qualify as subsequent innocent purchasers. In the course of its
discussion, the Court noted that "[t]he cancellation made by Franks could not, in any event,
protect [the Welches] unless it was made before they purchased and in fact purchased relying on
its validity." Id. at 420, 94 S.E.2d at 349.
Subsequently, in Smith v. United Carolina Bank, 1995 U.S. App. LEXIS 696 (4th Cir. Jan. 13,
1995), the Fourth Circuit, in an unpublished opinion referencing the Monteith quote above,
stated:From this passage, we discern the following rule of North Carolina law: a subsequent lien
creditor with a properly recorded deed of trust enjoys priority, despite the unauthorized
cancellation of a prior deed of trust, if the subsequent creditor obtains its deed of trust after the
cancellation has occurred, in reliance on the cancellation's validity, and without knowledge that
the cancellation was unauthorized.
Id. at *9. This "passage," however, was plainly obiter dictum, and does not constitute the Court's
holding in Monteith. Furthermore, any purported rule of law that the Fourth Circuit formulated in
an unpublished opinion based on that dictum is not controlling on this Court.
Here, the trial court correctly determined that the law stated by our Supreme Court in Union
Cent. Life Ins. Co. v. Cates, 193 N.C. 456, 137 S.E. 324 (1927), and followed in First Financial,
is the long-standing rule in North Carolina, and thus controls the resolution of this case.
As between a mortgagee, whose mortgage has been discharged of record solely through the act of
a third person, whose act was unauthorized by the mortgagee, and for which he is in no way
responsible, and a person who has been induced by such cancellation to believe that the mortgage
has been canceled in good faith . . . the equities are balanced, and the lien of the prior mortgage,
being first in order of time, is superior.
Union Central, 193 N.C. at 462, 137 S.E. at 327 (quotation marks and citations omitted).
In First Financial, Mr. and Mrs. Sledge executed a promissory note secured by a deed of trust to
Henry A. Boyd, trustee, and First Financial Savings Bank, Inc. The deed of trust was recordedand
secured First Financial's lien on real estate lots 28, 29, 31, 34, and 35. Subsequently, Mr. Sledge
requested a release deed for lot 31 and agreed to pay First Financial a release fee. After receiving
the fee, First Financial gave Mr. Sledge the unrecorded deed releasing lot 31. Without the
knowledge or authorization of First Financial, Mr. Sledge altered the release deed to include lots
28, 29, and 34. He then recorded the deed for the release of lots 28, 29, 31, and 34. First
Financial, 106 N.C. App. 87, 415 S.E.2d 206.
The Sledges later sold lot 34 to the Walkers. The deed for the sale of lot 34 was recorded, and the
Walkers subsequently executed a deed of trust on that lot in favor of the State Employees' Credit
Union. After discovering the release deed had been materially altered, First Financial brought an
action to set aside the release deed as it pertained to lots 28, 29, and 34. The trial court granted
summary judgment in favor of First Financial, and this Court affirmed. Id. Citing Union Central,
this Court stated: "The law in this State is clear regarding material alterations of written
instruments. The discharge of a perfected mortgage upon public record by the act of an
unauthorized third party entitles the mortgagee to restoration of its status as a priority lienholder
over an innocent purchaser for value." First Financial, 106 N.C. App. at 88, 415 S.E.2d at 207.
The law as enunciated in Union Central, and followed in First Financial, is the rule in North
Carolina, and Monteith did not overturn it. Accordingly, the trial court correctly applied thelaw
of North Carolina to the facts in this case and correctly determined that the Household Deed of
Trust, which had been cancelled of record by the unauthorized act of the Dorean Group, was
entitled to priority over the Fremont Deed of Trust, such deed of trust, and the underlying loan,
having been made and given by Fremont in reliance upon the presumed validity of the record
cancellation of the Household Deed of Trust. Fremont's assignment of error is overruled.
Fremont next contends that Household's failure to respond to the Administrative Demand should
preclude Household from having its Deed of Trust reinstated as the superior lien. We disagree.
The discharge of a perfected mortgage upon public record by the act of an unauthorized third
party entitles the mortgagee to restoration of its status as a priority lienholder over an innocent
purchaser for value. Union Central Life Insurance Co. v. Cates, 193 N.C. 456, 462, 137 S.E. 324,
327 (1927). The owner of a mortgage, however, will lose priority over an innocent purchaser if
the mortgagee is negligent with respect to the release of the mortgage. Id.
First Financial, 106 N.C. App. at 88, 415 S.E.2d at 207-08.
In its judgment, the trial court made the following finding of fact:
9. Household did not reply to the Administrative Demand and filed no document on the public
record with respect to the [Lambeth] Property prior to the Unauthorized Cancellation, even
though Defendant Lambeth stopped paying on the Note in May 2004; however, the existence of
the mortgage elimination scheme was not well known to mortgage companies such as Household
and Fremont at the time and the Court does not find that Household's failure to takeaffirmative
action was unreasonable or breached any duty Household owed to Fremont.
The trial court also made the following conclusion of law:
7. The Court, having found that Household was not negligent in its handling of the
Administrative Demand and the Unauthorized Cancellation, concludes that Household did not
breach any duty it owed that caused injury to Fremont.
Fremont contends that the trial court, in reaching the quoted finding and conclusion, improperly
applied a tort law negligence standard to determine that Household was not at fault for the
Unauthorized Cancellation of its lien. Fremont argues that the rule in Union Central instead
requires a "balancing of the equities" in determining whether an instrument wrongfully cancelled
is entitled to priority over subsequent innocent purchasers once the cancelled instrument is
restored as a lien. Fremont further contends that, when balancing the equities between two
innocent lienholders, the threshold question is whether the lender whose instrument was
wrongfully cancelled was "in any way responsible" for the harm. We conclude that, regardless of
the test applied in this case, Household's actions or inactions do not preclude Household from
having its Deed of Trust reinstated as the superior lien.
In First Financial, the sole issue on appeal was whether First Financial Savings Bank was
negligent in giving its mortgagor, Mr. Sledge, possession of an unrecorded release deed. This
Court found that First Financial breached no duty in giving Mr. Sledge possession of the deed as
"[t]here are neither cases nor statuteswhich require a mortgagee to record a release deed prior to
delivering it to the mortgagor." First Financial, 106 N.C. App. at 88, 415 S.E.2d at 208. This
Court thus held that "Mr. Sledge's alteration of the deed was an unauthorized act, and [First
Financial Savings Bank was] in no way negligent for his act." Id. at 88-89, 415 S.E.2d at 208.
Similarly, here, there were neither statutes nor case law that imposed any duty on Household to
respond to the Administrative Demand. The Dorean Group's cancellation of the Household Deed
of Trust was an unauthorized act, and Household was in no way negligent for the Dorean Group's
act. Furthermore, Household was "in no way responsible" for the Unauthorized Cancellation of
the Household Deed of Trust, or any injury Fremont sustained as a result of the Dorean Group's
fraud. Although Fremont contends that the Administrative Demand provided Household with a
"roadmap" of the fraud several months before it occurred, upon reviewing the Administrative
Demand, the trial court correctly found that "Household's failure to take affirmative action was
not unreasonable[.]" The 38-page Administrative Demand, or so-called "roadmap," was a
confusing compilation of, among other things: (i) various cartoons; (ii) various articles; (iii) a
power of attorney; (iv) a "Notice of Intent to Correct Title"; (v) a so-called "Affidavit of Truth";
(vi) a letter from a purported certified public accountant; (vii) and various propaganda. To
characterize this document as bizarre and absurd would be an understatement. The
Administrative Demand was wholly inadequate to raiseHousehold's suspicions of potential
impending wrongdoing by the Dorean Group, especially since, as the trial court found, "the
existence of the mortgage elimination scheme was not well known to mortgage companies such
as Household and Fremont at the time" the Administrative Demand was delivered to Household.
As it would not have occurred to anyone of ordinary business judgment and prudence to make
any inquiry into the information contained therein, Household's inaction was reasonable.
Furthermore, Household did not actually learn of the Unauthorized Cancellation until 26 October
2004, four days after Fremont extended its loan to Lambeth. As such, Household could not have
prevented Fremont's harm by taking immediate action once it learned of the Unauthorized
Cancellation, as the harm had already been done. Finally, Household filed a lawsuit within four
months of discovering the fraud, a reasonable time considering the substantial investigation
required to address the fraudulent mortgage elimination scheme. Moreover, there is no evidence
that Fremont suffered any injury based on any action or inaction during the time between
Household's discovery of the Unauthorized Cancellation and Household's filing of a lawsuit.
Accordingly, the trial court correctly concluded that Household's failure to respond to the
Administrative Demand did not preclude Household from having its Deed of Trust reinstated as
the superior lien. Fremont's assignment of error is overruled.
For the reasons stated, the trial court's judgment is
AFFIRMED.
Judges CALABRIA and ARROWOOD concur.
Footnote: 1
The court also granted summary judgment in favor of Household Realty Corporation and against
Lambeth in the sum of $486,177.66, with interest thereon, representing the outstanding principal and
interest on the Household Note.
the North Carolina Reports and North Carolina Court of Appeals Reports. In the event of
discrepancies between the electronic version of an opinion and the print version appearing in the
North Carolina Reports and North Carolina Court of Appeals Reports, the latest print version is
to be considered authoritative.
NO. COA07-362
NORTH CAROLINA COURT OF APPEALS
Filed: 5 February 2008
HOUSEHOLD REALTY CORPORATION and
HSBC MORTGAGE SERVICES INC.,
Plaintiffs,
v . Guilford County
No. 05 CVS 4269
JOYCE EARL DELANCY LAMBETH a/k/a
J.E.D. LAMBETH, individually;
D. SCOTT HEINEMAN and KURT F. JOHNSON,
individually and as Trustees of the
"Lambeth Family Trust," and
FREMONT INVESTMENT & LOAN,
Defendants.
Appeal by Defendant Fremont Investment & Loan from judgment entered 11 September 2006 by
Judge R. Stuart Albright in Guilford County Superior Court. Heard in the Court of Appeals 17
October 2007.
Katten Muchin Rosenman LLP, by Jeffrey C. Grady, Bradley E. Pearce, and Richard L. Farley,
for Plaintiffs-Appellees.
Roberson Haworth & Reese, P.L.L.C., by Alan B. Powell and Christopher C. Finan, for
Defendant-Appellant.
STEPHENS, Judge.
This matter arises out of a fraudulent mortgage elimination scheme participated in by defendant
Joyce Earl Delancy Lambeth ("Lambeth") and orchestrated by defendants Kurt F. Johnson and D.
Scott Heineman, the principals of the Dorean Group. This scheme operated to fraudulently
remove valid deeds of trust and mortgages given to lenders as security for residential loans. The
fraudulentmortgage elimination scheme ultimately victimized both appellant Fremont Investment
& Loan ("Fremont") and appellees Household Realty Corporation and HSBC Mortgage Services,
Inc. (collectively, "Household").
The sole matter before this Court on this appeal involves a priority dispute between Household
and Fremont in connection with deeds of trust in favor of Household and Fremont that were
negatively affected by the fraudulent mortgage elimination scheme.
I. FACTS
Lambeth acquired real property located at 3914 Berkshire Drive, Browns Summit, North
Carolina 27214 ("Lambeth Property") by Special Warranty Deed dated 23 September 1997, and
recorded on 3 October 1997 in the Guilford County Register of Deeds. On or about 18 February
2000, Lambeth executed and delivered to mortgage lender Axiom Financial Services an
adjustable rate note for the principal amount of $400,000.00, and a deed of trust, pledging the
Lambeth Property to secure Lambeth's obligations under the note. The deed of trust was duly
recorded with the Guilford County Register of Deeds on 29 February 2000.
During 2000, Axiom assigned and transferred to Household the note ("Household Note") and the
deed of trust ("Household Deed of Trust"). In connection with the transfer and assignment, two
assignments of Deed of Trust were recorded with the Guilford County Register of Deeds.
A. FACTS RELATED TO THE FRAUDULENT CANCELLATION
On or about 24 March 2004, Lambeth recorded a quitclaim deed with the Guilford County
Register of Deeds. This deed purported to transfer all of Lambeth's rights and interest in the
Lambeth Property to defendants Heineman and Johnson, as Trustees of the "Lambeth Family
Trust." The transfer was made without notice to or the consent of Household.
On or about 23 April 2004, Heineman and Johnson, as the purported Trustees of the Lambeth
Family Trust, mailed Household 38 pages of documents purporting to be part of a "Private
International Remedy Demand Number HMS-042304-JEDL" ("Administrative Demand"). The
Administrative Demand purported to, among other things, create a self-executing agreement
whereby Household automatically appointed Heineman as "attorney-in-fact" for Household, and
authorized Heineman and Johnson to prepare and record all necessary documents for "proper
reconveyance" of the Lambeth Property if Household, within 10 days, did not rebut "point for
point" a so-called "Affidavit of Truth" contained therein. Household did not respond to the
Administrative Demand.
On or about 3 August 2004, the Dorean Group fraudulently cancelled the Household Deed of
Trust by recording fraudulent documents with the Guilford County Register of Deeds. First,
without Household's authorization, the Dorean Group recorded a document captioned
"Substitution of Trustee," representing that Heineman was the "attorney-in-fact" for Household
Mortgage Services, and further purporting to substitute Lambeth as Trustee under the Household
Deed of Trust. Immediately thereafter, theDorean Group fraudulently recorded a so-called "Full
Reconveyance" wherein Heineman, as the purported Trustee for Household under the Household
Deed of Trust, represented that (i) all sums secured by the Household Deed of Trust had been
paid, and (ii) the Household Deed of Trust and the Household Note had been surrendered to the
Trustee for cancellation. Both statements were false. The Full Reconveyance also purported to
reconvey the estate to the Lambeth Family Trust. The Substitution of Trustee and the Full
Reconveyance are hereinafter referred to as the "Unauthorized Cancellation."
B. FACTS RELATING TO THE FREMONT LOAN
On 22 October 2004, four days prior to the date Household learned of the Unauthorized
Cancellation, Lambeth obtained a new loan from Fremont, executing a promissory note in the
amount of $367,000.00 payable to Fremont ("Fremont Note") and executing a deed of trust in
favor of Fremont ("Fremont Deed of Trust"), pledging the Lambeth Property as security for the
Fremont Note.
For reasons which do not appear of record, the Fremont Deed of Trust was not recorded in the
records of the Guilford County Register of Deeds until 28 January 2005. Fremont purportedly
relied on an examination of the records of the Guilford County Register of Deeds, up to and
including 12 September 2004, to determine that the Lambeth Property was unencumbered at the
time Lambeth executed the Fremont Deed of Trust on 22 October 2004. The Unauthorized
Cancellation was included in the documents upon which Fremont relied.
C. FACTS RELATING TO THE PRIORITY DISPUTE ON APPEAL
By Order and Judgment entered 28 August 2006, the General Court of Justice, Superior Court
Division for Guilford County, held that the Household Deed of Trust was fraudulently cancelled
and should be reinstated as a lien on the Lambeth Property. (See footnote 1) The summary
judgment was not appealed. The Judgment and Order did not specify a reinstatement date of the
Household Deed of Trust and, therefore, left the priority issue between the Household Deed of
Trust and the Fremont Deed of Trust to be determined at a subsequent hearing.
On 28 August 2006, the Honorable Stuart Albright presided over the bench trial between
Household and Fremont. On 11 September 2006, Judge Albright entered Judgment in favor of
Household, restoring the Household Deed of Trust as a lien upon the Lambeth Property, effective
from its original recordation date of 29 February 2000. As between the Household Deed of Trust
and the Fremont Deed of Trust, the trial court held the Household Deed of Trust to be a "first-intime
superior lien" against the Lambeth Property. Fremont appeals this Judgment. We affirm.
II. DISCUSSION
Fremont first contends the trial court erred in applying the rule of law discussed in First Fin.
Savings Bank, Inc. v. Sledge, 106 N.C. App. 87, 415 S.E.2d 206 (1992), in determining that
theHousehold Deed of Trust was entitled to priority over the Fremont Deed of Trust. Fremont
argues the trial court should have relied on Monteith v. Welch, 244 N.C. 415, 94 S.E.2d 345
(1956), instead, to reach a ruling in favor of Fremont. We disagree for the following reasons:
The Monteiths were the beneficiaries of a properly recorded deed of trust for which Thomas
Franks was named as trustee. After several years, the underlying property was sold to the
Welches. At the time of the sale, the Monteiths' deed of trust had not been cancelled. The
Welches, aware of the outstanding lien, gave Franks money at closing to pay the Monteiths to
cancel their deed of trust. Although Franks cancelled the Monteiths' deed of trust eight days later,
he never paid the Monteiths. The Monteiths then sued to re-establish their security interest.
Monteith, 244 N.C. 415, 94 S.E.2d 345.
The North Carolina Supreme Court rejected the Welches' argument that they were entitled to rely
on Franks' cancellation of the lien. The Court held that since the Welches had notice of the
Monteiths' senior lien, they did not qualify as subsequent innocent purchasers. In the course of its
discussion, the Court noted that "[t]he cancellation made by Franks could not, in any event,
protect [the Welches] unless it was made before they purchased and in fact purchased relying on
its validity." Id. at 420, 94 S.E.2d at 349.
Subsequently, in Smith v. United Carolina Bank, 1995 U.S. App. LEXIS 696 (4th Cir. Jan. 13,
1995), the Fourth Circuit, in an unpublished opinion referencing the Monteith quote above,
stated:From this passage, we discern the following rule of North Carolina law: a subsequent lien
creditor with a properly recorded deed of trust enjoys priority, despite the unauthorized
cancellation of a prior deed of trust, if the subsequent creditor obtains its deed of trust after the
cancellation has occurred, in reliance on the cancellation's validity, and without knowledge that
the cancellation was unauthorized.
Id. at *9. This "passage," however, was plainly obiter dictum, and does not constitute the Court's
holding in Monteith. Furthermore, any purported rule of law that the Fourth Circuit formulated in
an unpublished opinion based on that dictum is not controlling on this Court.
Here, the trial court correctly determined that the law stated by our Supreme Court in Union
Cent. Life Ins. Co. v. Cates, 193 N.C. 456, 137 S.E. 324 (1927), and followed in First Financial,
is the long-standing rule in North Carolina, and thus controls the resolution of this case.
As between a mortgagee, whose mortgage has been discharged of record solely through the act of
a third person, whose act was unauthorized by the mortgagee, and for which he is in no way
responsible, and a person who has been induced by such cancellation to believe that the mortgage
has been canceled in good faith . . . the equities are balanced, and the lien of the prior mortgage,
being first in order of time, is superior.
Union Central, 193 N.C. at 462, 137 S.E. at 327 (quotation marks and citations omitted).
In First Financial, Mr. and Mrs. Sledge executed a promissory note secured by a deed of trust to
Henry A. Boyd, trustee, and First Financial Savings Bank, Inc. The deed of trust was recordedand
secured First Financial's lien on real estate lots 28, 29, 31, 34, and 35. Subsequently, Mr. Sledge
requested a release deed for lot 31 and agreed to pay First Financial a release fee. After receiving
the fee, First Financial gave Mr. Sledge the unrecorded deed releasing lot 31. Without the
knowledge or authorization of First Financial, Mr. Sledge altered the release deed to include lots
28, 29, and 34. He then recorded the deed for the release of lots 28, 29, 31, and 34. First
Financial, 106 N.C. App. 87, 415 S.E.2d 206.
The Sledges later sold lot 34 to the Walkers. The deed for the sale of lot 34 was recorded, and the
Walkers subsequently executed a deed of trust on that lot in favor of the State Employees' Credit
Union. After discovering the release deed had been materially altered, First Financial brought an
action to set aside the release deed as it pertained to lots 28, 29, and 34. The trial court granted
summary judgment in favor of First Financial, and this Court affirmed. Id. Citing Union Central,
this Court stated: "The law in this State is clear regarding material alterations of written
instruments. The discharge of a perfected mortgage upon public record by the act of an
unauthorized third party entitles the mortgagee to restoration of its status as a priority lienholder
over an innocent purchaser for value." First Financial, 106 N.C. App. at 88, 415 S.E.2d at 207.
The law as enunciated in Union Central, and followed in First Financial, is the rule in North
Carolina, and Monteith did not overturn it. Accordingly, the trial court correctly applied thelaw
of North Carolina to the facts in this case and correctly determined that the Household Deed of
Trust, which had been cancelled of record by the unauthorized act of the Dorean Group, was
entitled to priority over the Fremont Deed of Trust, such deed of trust, and the underlying loan,
having been made and given by Fremont in reliance upon the presumed validity of the record
cancellation of the Household Deed of Trust. Fremont's assignment of error is overruled.
Fremont next contends that Household's failure to respond to the Administrative Demand should
preclude Household from having its Deed of Trust reinstated as the superior lien. We disagree.
The discharge of a perfected mortgage upon public record by the act of an unauthorized third
party entitles the mortgagee to restoration of its status as a priority lienholder over an innocent
purchaser for value. Union Central Life Insurance Co. v. Cates, 193 N.C. 456, 462, 137 S.E. 324,
327 (1927). The owner of a mortgage, however, will lose priority over an innocent purchaser if
the mortgagee is negligent with respect to the release of the mortgage. Id.
First Financial, 106 N.C. App. at 88, 415 S.E.2d at 207-08.
In its judgment, the trial court made the following finding of fact:
9. Household did not reply to the Administrative Demand and filed no document on the public
record with respect to the [Lambeth] Property prior to the Unauthorized Cancellation, even
though Defendant Lambeth stopped paying on the Note in May 2004; however, the existence of
the mortgage elimination scheme was not well known to mortgage companies such as Household
and Fremont at the time and the Court does not find that Household's failure to takeaffirmative
action was unreasonable or breached any duty Household owed to Fremont.
The trial court also made the following conclusion of law:
7. The Court, having found that Household was not negligent in its handling of the
Administrative Demand and the Unauthorized Cancellation, concludes that Household did not
breach any duty it owed that caused injury to Fremont.
Fremont contends that the trial court, in reaching the quoted finding and conclusion, improperly
applied a tort law negligence standard to determine that Household was not at fault for the
Unauthorized Cancellation of its lien. Fremont argues that the rule in Union Central instead
requires a "balancing of the equities" in determining whether an instrument wrongfully cancelled
is entitled to priority over subsequent innocent purchasers once the cancelled instrument is
restored as a lien. Fremont further contends that, when balancing the equities between two
innocent lienholders, the threshold question is whether the lender whose instrument was
wrongfully cancelled was "in any way responsible" for the harm. We conclude that, regardless of
the test applied in this case, Household's actions or inactions do not preclude Household from
having its Deed of Trust reinstated as the superior lien.
In First Financial, the sole issue on appeal was whether First Financial Savings Bank was
negligent in giving its mortgagor, Mr. Sledge, possession of an unrecorded release deed. This
Court found that First Financial breached no duty in giving Mr. Sledge possession of the deed as
"[t]here are neither cases nor statuteswhich require a mortgagee to record a release deed prior to
delivering it to the mortgagor." First Financial, 106 N.C. App. at 88, 415 S.E.2d at 208. This
Court thus held that "Mr. Sledge's alteration of the deed was an unauthorized act, and [First
Financial Savings Bank was] in no way negligent for his act." Id. at 88-89, 415 S.E.2d at 208.
Similarly, here, there were neither statutes nor case law that imposed any duty on Household to
respond to the Administrative Demand. The Dorean Group's cancellation of the Household Deed
of Trust was an unauthorized act, and Household was in no way negligent for the Dorean Group's
act. Furthermore, Household was "in no way responsible" for the Unauthorized Cancellation of
the Household Deed of Trust, or any injury Fremont sustained as a result of the Dorean Group's
fraud. Although Fremont contends that the Administrative Demand provided Household with a
"roadmap" of the fraud several months before it occurred, upon reviewing the Administrative
Demand, the trial court correctly found that "Household's failure to take affirmative action was
not unreasonable[.]" The 38-page Administrative Demand, or so-called "roadmap," was a
confusing compilation of, among other things: (i) various cartoons; (ii) various articles; (iii) a
power of attorney; (iv) a "Notice of Intent to Correct Title"; (v) a so-called "Affidavit of Truth";
(vi) a letter from a purported certified public accountant; (vii) and various propaganda. To
characterize this document as bizarre and absurd would be an understatement. The
Administrative Demand was wholly inadequate to raiseHousehold's suspicions of potential
impending wrongdoing by the Dorean Group, especially since, as the trial court found, "the
existence of the mortgage elimination scheme was not well known to mortgage companies such
as Household and Fremont at the time" the Administrative Demand was delivered to Household.
As it would not have occurred to anyone of ordinary business judgment and prudence to make
any inquiry into the information contained therein, Household's inaction was reasonable.
Furthermore, Household did not actually learn of the Unauthorized Cancellation until 26 October
2004, four days after Fremont extended its loan to Lambeth. As such, Household could not have
prevented Fremont's harm by taking immediate action once it learned of the Unauthorized
Cancellation, as the harm had already been done. Finally, Household filed a lawsuit within four
months of discovering the fraud, a reasonable time considering the substantial investigation
required to address the fraudulent mortgage elimination scheme. Moreover, there is no evidence
that Fremont suffered any injury based on any action or inaction during the time between
Household's discovery of the Unauthorized Cancellation and Household's filing of a lawsuit.
Accordingly, the trial court correctly concluded that Household's failure to respond to the
Administrative Demand did not preclude Household from having its Deed of Trust reinstated as
the superior lien. Fremont's assignment of error is overruled.
For the reasons stated, the trial court's judgment is
AFFIRMED.
Judges CALABRIA and ARROWOOD concur.
Footnote: 1
The court also granted summary judgment in favor of Household Realty Corporation and against
Lambeth in the sum of $486,177.66, with interest thereon, representing the outstanding principal and
interest on the Household Note.