|
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.
If you have any
questions regarding this alert or other Construction Law issues, please
contact
Julie
Hampton at 919.783.2819 or
jhampton@poynerspruill.com
or John Shaw at
919.783.2809 or
jshaw@poynerspruill.com. |
