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Deeds of Trust v. Perfected Materialmens' Liens: Whose Interest is More Protected?

12.7.2006

In September, the North Carolina Court of Appeals addressed an issue of interest to general contractors, subcontractors, and mortgage lenders: the priority rules between materialmens' liens perfected under Chapter 44A of the North Carolina General Statutes and relating back prior to the recording of deeds of trust which secured the purchase of the property, also known as "purchase money deeds of trust," and those deeds of trust. In West Durham Lumber Company v. Meadows et al., Defendants Central Carolina Bank ("CCB") and Southland Associates appealed from a trial court's decision which gave the Plaintiff, West Durham Lumber Company, priority through its perfected materialman's lien over a purchase money deed of trust. The Court of Appeals ultimately reversed the decision and found in favor of CCB, giving priority to that portion of the deed of trust that secured the purchase of the property.
In February of 2003, the defendant homebuilder contacted CCB about a loan to purchase the property from the current owner. The homebuilder received a commitment letter from CCB for $560,000 on February 25, 2003, and the property was conveyed by deed to the homebuilder on March 7, 2003. On March 18, 2003, West Durham Lumber Company furnished their first materials to the lot. On March 25, 2003, the homebuilder executed a deed of trust in favor of CCB and recorded both its deed and the deed of trust the next day. CCB closed the loan and initially advanced $112,000 to the homebuilder to purchase the property. The deed of trust also secured future advances up to $560,000.

CCB began foreclosure proceedings in August, after the homebuilder had defaulted on the loan. Between the closing and the foreclosure, CCB had advanced $524,000 to the homebuilder, all of which was secured by the deed of trust. CCB foreclosed on the property and purchased it for $425,000 at a foreclosure sale on October 2, 2003. On October 14, 2003, West Durham Lumber Company filed a timely Chapter 44A claim of lien on real property and complaint to enforce said lien on the foreclosed lot, stating that the homebuilder, CCB, and Southland Associates owed them $77,625.51 plus interest and attorney's fees.

Because Chapter 44A provides that a materialman's lien filed within 120 days of the first furnishing of materials and perfected through suit within 180 days of the first furnishing relates back to the first date of furnishing, the Plaintiff's claim related back to March 18, 2003, prior to the recording of the deed of trust of CCB and the deed of the property to the homebuilder. Despite the priority afforded under the lien statutes to West Durham Lumber Company, the Court of Appeals, relying upon its similar rationale in Dalton Moran Shook, Inc. v. Pitt Development Co., held that the doctrine of "instantaneous seisin" acted to make the purchase money deed of trust to CCB superior to any and all liens, regardless of their priority.

"Instantaneous seisin" is a common law concept which holds that where a deed is given to a purchaser from a seller and a mortgage is given to that seller for the purchase price of his property and both executed at the same time, they are regarded as one transaction. Further, because they are regarded as one transaction, the title conveyed by the deed of trust attaches at the "instant" the title is acquired, and constitutes a lien superior to all others. The doctrine has since been held equally applicable where a third party loans the purchase price and accepts a deed of trust to secure the amount loaned. The doctrine was thereby applicable to the loan from CCB, and the court reversed the trial court's ruling in favor of the West Durham Lumber Company.

While this holding surely disappoints contractors and subcontractors who properly perfect their mechanics liens, only to have that priority extinguished by a purchase money deed of trust through instantaneous seisin, there is some good news. Because the lender's lien created by the deed of trust is only superior to the extent it secures the money necessary to purchase the property, the secured interest in the remainder borrowed for the construction on the property is junior to the interest of materialmens' liens that relate back prior to the date the deed of trust was recorded. Therefore, where the lot is foreclosed upon and funds in excess of that portion of the loan that was used to purchase the property exist, the materialman is entitled to the surplus provided he gives notice by filing a claim with the clerk of court in the foreclosure action for surplus funds. Furthermore, because "instantaneous seisin" relies upon the premise that the purchase of the property and the deed of trust executed to purchase the property are part of the same transaction, an argument against its application may at least exist where the purchase or the recording of the purchase and the execution of the deed of trust or the recordation of the same take place at different times.

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