Advertisement

July 25, 2014

Good News for Lenders! Minor Errors in Deeds of Trust Less Costly As Result of New Bankruptcy Court Opinion

Worried that a minor typo will invalidate your deed of trust?  After several years of rulings causing lenders in North Carolina to be understandably nervous, the United States Bankruptcy Court for the Eastern District of North Carolina has taken steps to quell those worries in a recent opinion. 

North Carolina law requires that a deed of trust “identify the obligation secured,” thereby ensuring that parties who search the public record are on notice that a particular piece of property secures a particular debt.  Since the Eastern District’s decision in In re Head Grading in 2006, lenders have had cause for concern about even the most minor of errors in their deeds of trust.  In Head Grading, the court invalidated a North Carolina Deed of Trust that specified a note date which was incorrect by one day.  The Head Grading opinion spawned many adversary proceedings in bankruptcy cases in which debtors or trustees sought to (and sometimes did) set aside deeds of trust based on similar errors.

The newest chapter of this saga stems from the same court’s decision in In re The Willows II, LLC wherein the court examines  the statutory intent behind requiring a deed of trust to identify the debt it secures, and applies a common sense analysis to determining whether the deed of trust is valid. See The Willows II v. Branch Banking and Trust Co., No. 12-00086-8-SWH (Bankr. E.D.N.C. Jan. 10, 2013).

As in Head Grading¸ the deed of trust in The Willows II referenced a promissory note using a date that differed from the actual note date by one day.  Nevertheless, in defining the indebtedness, the deed of trust correctly referenced the loan number, the commitment letter for the loan and deed of trust, the principal balance, and the named borrower and lender.  Every part of the description of the indebtedness contained in the deed of trust was correct except for the error in the note date. 

Refusing to create a bright-line rule invalidating deeds of trust due to minor errors in the note description, the Court turned to several North Carolina Supreme Court decisions explaining the intent behind requiring a deed of trust to identify the note it secures.  Interpreting that intent more broadly, the deed of trust must put subsequent purchasers on notice of the nature and amount of the obligation secured, and may in no way deceive or mislead those examining the public record as to these facts.  The promissory note or secured obligation must be defined specifically enough to prevent fraudulent substitution of a false debt or a debt that was not intended by the parties to be secured.  However, minor errors are viewed in context. 

Taking this new approach, the Court upheld the validity of the deed of trust in The Willows II, finding that the note description therein provided “a sufficient basis to conclude that the Note is the obligation intended to be secured by the parties, even though it incorrectly references a Note executed one day prior to the date of the Note.” The debtor still has an opportunity to appeal the Court’s holding, but in the meantime, this new opinion equips lenders with greater defenses to efforts to invalidate deeds of trust based on clerical errors.  Even so, the analysis turns on the specific facts of each case. 

While the scales of justice may be tipped a little more favorably toward lenders after this ruling, when faced with a deed of trust that contains any error in the description of the note, lenders should consult legal counsel to determine if the error can be corrected, and assess the risk of invalidation in state or federal court.  

© 2014 Poyner Spruill LLP. All rights reserved.

About the Author

Partner

Deborah practices in the areas of Creditors' Rights, Civil and Commercial Litigation, and Bankruptcy. She frequently represents creditors in workouts, foreclosures, collections, bankruptcies, and lender liability matters. Her practice also includes representation of businesses and individual clients in a wide variety of civil litigation matters before State and Federal Courts, including contract disputes, fiduciary duty claims, property disputes, and fraud claims.

252-972-7095

About the Author

Associate

Jill joined the firm in September of 2008 and is a member of the Creditors’ Rights and Bankruptcy Section.  She regularly represents creditors in United States Bankruptcy Court and out-of-court workouts.  Jill also represents lienholders and suppliers involved in construction disputes and a variety of state court litigation matters.

Prior Legal Experience

Jill spent her first year of practice as a Staff Attorney for the United States Bankruptcy Administrator for the Eastern District of North Carolina.

(919) 783-2961

Boost: AJAX core statistics

Legal Disclaimer

You are responsible for reading, understanding and agreeing to the National Law Review's (NLR’s) and the National Law Forum LLC's  Terms of Use and Privacy Policy before using the National Law Review website. The National Law Review is a free to use, no-log in database of legal and business articles. The content and links on www.NatLawReview.com are intended for general information purposes only. Any legal analysis, legislative updates or other content and links should not be construed as legal or professional advice or a substitute for such advice. No attorney-client or confidential relationship is formed by the transmission of information between you and the National Law Review website or any of the law firms, attorneys or other professionals or organizations who include content on the National Law Review website. If you require legal or professional advice, kindly contact an attorney or other suitable professional advisor.  

Some states have laws and ethical rules regarding solicitation and advertisement practices by attorneys and/or other professionals. The National Law Review is not a law firm nor is www.NatLawReview.com  intended to be  a referral service for attorneys and/or other professionals. The NLR does not wish, nor does it intend, to solicit the business of anyone or to refer anyone to an attorney or other professional.  NLR does not answer legal questions nor will we refer you to an attorney or other professional if you request such information from us. 

Under certain state laws the following statements may be required on this website and we have included them in order to be in full compliance with these rules. The choice of a lawyer or other professional is an important decision and should not be based solely upon advertisements. Attorney Advertising Notice: Prior results do not guarantee a similar outcome. Statement in compliance with Texas Rules of Professional Conduct. Unless otherwise noted, attorneys are not certified by the Texas Board of Legal Specialization, nor can NLR attest to the accuracy of any notation of Legal Specialization or other Professional Credentials.

The National Law Review - National Law Forum LLC 4700 Gilbert Ave. Suite 47 #230 Western Springs, IL 60558  Telephone  (708) 357-3317 If you would ike to contact us via email please click here.