Swindell v. Overton

314 S.E.2d 512 (1984) 310 N.C. 707

Roger SWINDELL and wife, Betty L. Swindell
v.
Larry OVERTON, Substitute Trustee, Thomas Edison Cahoon and wife, Julia Jones Cahoon, Walter G. Credle and wife, Donna S. Credle.

No. 323PA83.

Supreme Court of North Carolina.

April 30, 1984.

J. Michael Weeks, P.A. by J. Michael Weeks, Zebulon, for plaintiffs.

Cherry, Cherry, Flythe & Overton by Thomas L. Cherry and Joseph J. Flythe, Ahoskie, for defendant Overton.

Geo. Thomas Davis, Jr., Swan Quarter, for defendants Credle.

MARTIN, Justice.

In its opinion, the Court of Appeals held that pursuant to N.C.G.S. 45-21.34, .35, Judge Peel had correctly entered summary judgment for defendants Overton, Cahoon, and Credle as to plaintiffs' right to injunctive relief in this matter. "Once the Clerk's Order of Confirmation is entered, an action for injunctive relief will not lie...." 62 N.C.App. at 166, 302 S.E.2d at 845. The opinion further concluded, at least by implication that the plaintiffs Swindell are also barred from the remedy of setting aside the foreclosure sale on the same grounds that their action was not brought until after the sale was confirmed. Upon this conclusion rests the holding that summary judgment in favor of the Credles was therefore proper on the issue of plaintiffs' claim for damages against the Credles for conversion of the soybean crop, given the well-settled North Carolina rule that the purchaser at a foreclosure sale is entitled to crops unsevered at the time of the trustee's delivery of the deed. Collins v. Bass, 198 N.C. 99, 150 S.E. 706 (1929). We granted discretionary review to consider the correctness of these conclusions, and we reverse. As a matter of law plaintiffs should be allowed to challenge the clerk's confirmation of a foreclosure sale by an independent action under circumstances hereinafter set forth. We further find that the forecast of evidence as established by the exhibits and affidavits before the trial court was clearly sufficient to survive the summary judgment motion of the defendant-purchasers Credle.

The trustee is bound by his office to present the sale under every possible advantage to the debtor as well as to the creditor. He is bound to use not only good faith but also every requisite degree of diligence in conducting the sale and to attend equally to the interest of the debtor and creditor alike. Mills v. Building & Loan Assn, 216 N.C. 664, 6 S.E.2d 549 (1940).

Our analysis is twofold: (1) Plaintiffs are correct in applying this Court's decision in Foust v. Loan Asso., 233 N.C. 35, 62 S.E.2d 521 (1950), to this case. (2) Because the facts of this case do not support a finding that the defendants Credle were innocent purchasers for value, they are not protected thereby from having the foreclosure sale set aside.

In Foust, property having a market value of approximately $6,000 was sold at foreclosure for $825. The trustee erroneously reported that it was sold for $6,400. The sale was confirmed. This Court responded as follows: "These facts raise the single question of law: Was the irregularity in the report of such substantial nature as to require the Court to vacate the order of confirmation and the deed executed pursuant thereto? We must answer in the affirmative." 233 N.C. at 36, 62 S.E.2d at 523.

The Court spoke to the nature and potential effects of the irregularity:

There is no contention that the error in the report was deliberate, or was prompted by an evil purpose, or was other than the result of an honest mistake. It appears to have been one of those slips which may occur in business transactions. Nonetheless, it was highly deceptive and its natural and probable effect was to chill any desire on the part of interested parties to engage in further competitive bidding. Thus it tended to prevent any upset bid.

Actuality of injury is not a prerequisite of relief. The potentialities of the error, considered in connection with the grossly inadequate price, compel the conclusion that the irregularity in the sale was material and prejudicial—sufficient in nature to justify the interposition of a court of equity.

233 N.C. at 37-38, 62 S.E.2d at 523 (emphasis added).

Allegations of inadequacy of the purchase price realized at a foreclosure sale which has in all other respects been duly and properly conducted in strict conformity with the power of sale will not be sufficient to upset a sale. Hill v. Fertilizer Co., 210 N.C. 417, 187 S.E. 577 (1936); Roberson v. Matthews; Matthews v. Roberson, 200 N.C. 241, 156 S.E. 496 (1931); Weir v. Weir, 196 N.C. 268, 145 S.E. 281 (1928). Foust stands for the proposition that it is the materiality of the irregularity in such a sale, not mere inadequacy of the purchase price, which is determinative of a decision in equity to set the sale aside. Where an irregularity is first alleged, gross inadequacy of purchase price may then be considered on the question of the materiality of the irregularity. Foust, supra, 233 N.C. 35, 62 S.E.2d 521; Hill v. Fertilizer Co., supra (and cases cited therein). Where inadequacy of purchase price is necessary to establish the materiality of the irregularity, it must also appear that the irregularity or unusual circumstance caused the inadequacy of price. 2 Wiltsie, Mortgage Foreclosure § 899 (5th ed. 1939).

Plaintiffs Swindell were obligors and defendants Cahoon were obligees on three separate notes for $2,000, $30,000, and $2,589, secured by two deeds of trust on two different tracts of land. The worth of the land was alleged to be in excess of $70,000, excluding the value of a growing soybean crop on one of the tracts, to which an additional $50,000 in value was alleged. Despite plaintiffs' requests that bids be received for the two tracts of land separately as well as together in order to maximize the potential sale price, defendant Overton advertised and sold the land together, in one offering, with the Credles purchasing at the third and final sale for $47,980.

We hold that the en masse sale of these two tracts of land constituted a material and prejudicial irregularity commensurate in severity to that found by the Court in Foust. Had the two tracts of land been sold separately, the Swindells might have recouped an amount on one tract sufficient to repay the debt on the second, thus saving at least one of the two pieces of property. The property had the alleged potential of yielding over $120,000, including the alleged $50,000 soybean crop.

It must be remembered that this case involves two distinct deeds of trust. Arguments having to do with the discretion of the trustee to sell land as a whole or in parcels have no place here, but are properly considered where the land in question is conveyed in a single mortgage instrument. We are in agreement with the following conclusion of the Court of Appeals in its opinion:

[S]ales of separately indentured properties must be separately conducted, in order to (1) maximize the potential value of each tract; (2) to facilitate the debtor's opportunity to satisfy each separate debt before sale is completed; (3) to properly allow upset bids on each separate property; and (4) to properly apply the proceeds from each sale, including the surplus, if any.

62 N.C.App. at 169, 302 S.E.2d at 847 (emphasis added).

We note that the preferred procedure, where possible, is for the party selling to obtain the mortgagor's agreement in advance as to the method of sale. See Osborne, Nelson, Whitman, Real Estate Finance Law § 7.20 (1979).

Our holding today is not affected by N.C.G.S. 45-21.34, .35. These statutes limit injunctive relief in foreclosure proceedings. Here, we are applying common law equitable principles to set aside a foreclosure sale. These principles are unaffected by these statutes. The Court of Appeals erroneously concluded otherwise.

It is true that where the defect in a foreclosure sale renders the sale voidable, as in the case at bar, the mortgagor's right of redemption can be cut off if the land is bought by a bona fide purchaser for value without notice. In such instances, a plaintiff is left with an action for damages against the trustee as his only remedy. Davis v. Doggett, 212 N.C. 589, 194 S.E. 288 (1937).

If the sale purchaser has paid value and is unrelated to the mortgagee, it would seem that he should take free of voidable defects if: (a) he has no actual knowledge of the defects; (b) he is not on reasonable notice from recorded instruments; and (c) the defects are not such that a person attending the sale exercising reasonable care would have been aware of the defect.

Osborne, Nelson, Whitman, supra. See also 2 Wiltsie, supra, § 780.

The Credles claim the status of "bona fide purchasers for value without any notice of irregularity." The advertisement of sale itself disclosed separate debts secured by two separate deeds of trust on two separate tracts of land. We hold that the purchasers had notice of the significant defect in the proceeding.

Applying these holdings to the opinion of the Court of Appeals, the results are:

(1) The Court of Appeals erred in affirming the summary judgment against plaintiffs on the action to set aside the sale. We therefore reverse.

(2) The Court of Appeals erred in affirming the summary judgment against plaintiffs on the action for conversion of crops. We therefore reverse.

(3) The Court of Appeals correctly reversed the summary judgment against plaintiffs' claim for breach of fiduciary duty. We therefore affirm.

(4) The Court of Appeals correctly affirmed plaintiffs' amending their complaint. We therefore affirm.

The case is remanded to the Court of Appeals for further remand to the superior court for proceedings not inconsistent with this opinion.

REVERSED IN PART; AFFIRMED IN PART.

COPELAND, J., did not participate in the consideration or discussion in this case.