Mortgage Foreclosure in North Carolina February 4, 2011 Jeff D. Rogers

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1 2011 Seminar Series Mortgage Foreclosure in North Carolina February 4, 2011 Jeff D. Rogers Smith Debnam Narron Drake Saintsing & Myers, L.L.P Six Forks Road, Suite 400 Raleigh, North Carolina (919) Attorneys Title 140 Iowa Lane, Suite 102 Cary, NC

2 Table of Contents Mortgage Foreclosure in North Carolina I. What is a Foreclosure 4 II. Mortgage vs. Deed of Trust.. 4 III. Pre-Foreclosure Considerations.. 6 A. Default and Acceleration Letters 7 B. Substitution of Trustee 13 C. Foreclosure on Property of Borrowers in Active Military Duty 13 D. Title Search 15 IV. The Foreclosure Hearing. 15 A. Setting the Hearing 16 B. Persons Entitled to Notice of the Hearing. 16 C. Contents of Notice of Hearing.. 17 D. Manner of Service of Notice of Hearing E. Written Statement Required by N.C. Gen. Stat (c)(5a) F. Conducting the Hearing 26 V. Appeal of the Decision of the Clerk of Court. 28 VI. Waiver of Hearing.. 28 VII. Foreclosure Sale.. 29 A. The Contents of the Notice of Sale B. Posting the Notice of Sale. 31 2

3 C. Publishing the Notice of Sale 31 D. Service of Notice of Sale.. 32 E. Internal Revenue Service Liens 35 F. Affidavit of Serving and Posting of Notice of Sale.. 36 G. Conducting the Sale.. 36 H. The Upset Bid I. Bidding Strategy 37 J. Postponement of Sale 38 VIII Enjoining Foreclosure Sales 39 A. Bankruptcy Petition.. 39 B. N.C. Gen. Stat IX. Defaulting Bidder 41 X. Final Report to Court.. 42 XI. Trustee s Deed and Notice of Completed Foreclosure XII. Surplus Proceeds.. 44 XIII. Alternatives to Foreclosure. 45 XIV. Obtaining Possession of Foreclosed Property 47 Table of Authorities. i 3

4 I. WHAT IS A FORECLOSURE The foreclosure process is the mechanism whereby a secured party enforces its lien rights in real property. In North Carolina, there are two means of foreclosure on real property. The first involves the provisions of Section 1-339, et seq., of the North Carolina General Statutes. This method is commonly known as a judicial foreclosure. The second method, governed by Chapter 45 of the General Statutes, and the most commonly used in North Carolina, is to foreclose based upon the power of sale granted in the deed of trust. This manuscript, while discussing the judicial foreclosure method, will focus primarily on foreclosure under the power of sale. II. MORTGAGE VS. DEED OF TRUST The most common form of instrument used in North Carolina to secure real property is the deed of trust. It involves three parties; the grantor or mortgagor, the grantee or mortgagee, and the trustee. The involvement of a trustee is a distinguishing feature of the deed of trust when compared to the mortgage. It is also helpful to understand the different theories involved in conveying title through a deed of trust. There are two legal theories under which a lien can be granted to secure real property. Under the first, called the Lien Theory, the property owner grants a lien to a creditor on his or her real property to secure a promissory note or other form of indebtedness. If a default occurs, the creditor enforces its rights in the property, usually through a foreclosure. Under the Title Theory of granting a lien on real property, the owner conveys legal title to his or her real property to a trustee, who holds title for the benefit of the lender. Equitable title is held by the owner. If there is a default under the promissory note, the trustee, upon request of the lender, forecloses on the real property in order to enforce the lender s security interest. North Carolina is a Title Theory state, as is evidenced by the fact that the deed of trust is the most common form of instrument used to secure a lien on real property. 4

5 As a practical matter, whether the state is a Lien Theory state, or a Title Theory state, a security interest in the real property is enforced in the same manner, which is through foreclosure. Our neighboring state, South Carolina, is a Lien Theory state and a mortgage is most commonly used to secure a lien on real property. When enforcing the lien rights of the lender who holds a mortgage, a lawsuit is typically filed with the court, wherein you request the court grant authority for the property to be sold. However, with a deed of trust, there is no lawsuit. Rather, the trustee enforces the lien rights pursuant to the power of sale by way of a Special Proceeding before the Clerk of Court. There are occasions when a mortgage may have been recorded in North Carolina, rather than a deed of trust. That mortgage can equally be enforced in our state through the judicial foreclosure method of foreclosure. Let s say that a debtor owns property that abuts the state line between North and South Carolina. The debtor goes to a mortgage company in South Carolina to take out a loan. Some lenders, particularly those that lend on the secondary market, prepare their own loan documents and many times, may close the loan in their office without the assistance of a closing attorney. The South Carolina mortgage company, who would routinely prepare a mortgage to secure the loan, may inadvertently do so to secure the North Carolina property. If properly recorded, that mortgage is enforceable in our state through a judicial foreclosure action. What gives the trustee the authority to sell real property under the deed of trust is the power of sale clause. This clause states that upon default, the trustee is authorized to commence foreclosure and sell the property. A mortgage does not have such a provision and usually, it specifically requires the creditor to bring suit to enforce the lien. Both the mortgage and the deed of trust require a court order to sell the property. However the manner in which that order is obtained, and who must enter that order, is another distinguishing feature of the two instruments. With a mortgage, the order is obtained from the District or Superior Court. The order under a deed of trust is obtained from the Clerk of Court in the county where the property is located. 5

6 III. PRE-FORECLOSURE CONSIDERATION A creditor who intends on foreclosing its lien in real property must take into consideration several factors before making its decision. Many of these factors have nothing to do with the default, the right to foreclosure, or the procedure needed to enforce the lien. Some such factors include: 1. The value of the collateral in relation to the amount of the loan due; 2. The creditor s lien position in the property; 3. Environmental issues that may render it undesirable for the creditor to become the owner of the property; and 4. Whether there are alternatives available to foreclosure, such as a workout plan with the debtor or perhaps a deed in lieu of foreclosure. The lender s attorney should be able to discuss these issues with the lender to assist the lender in making the decision to foreclose. For instance, a lender may hold a second deed of trust on the property. While that lender has the same foreclosure rights as the senior lien holder, as discussed in this manuscript later, its foreclosure will not affect the validity or enforceability of the senior lien. If the second lender forecloses and becomes the highest bidder at the sale, it will acquire title subject to the lien of the first lien holder. Therefore, the second lender will most likely be forced to pay off the superior lien in order to prevent that lien holder from foreclosing its deed of trust. If there is insufficient equity in the property, the second lien holder may not have accomplished anything other than ownership of the property and dispossessing the debtor therefrom. The purpose of a foreclosure is twofold. First, is to enforce the security interest in the property. Second is the cleansing effect that the foreclosure will have on junior lien on the property. If conducted correctly, the foreclosure will wipe-out any junior liens on the property. Superior liens will not be affected and whoever acquires title though the foreclosure action will take the property subject to any superior liens. There are a few exceptions to this cleansing effect of the 6

7 foreclosure. One exception worth mentioning is property tax due on the subject property. Those taxes, if not paid, will remain a lien on the property. Most property sold at foreclosure is sold subject to any property taxes due on the property. The purchaser at the foreclosure sale is not personally obligated to pay the taxes but if they were not paid, the taxing authority would be entitled to enforce its lien rights through a tax foreclosure action. In other words, if you purchase property at a foreclosure sale and there are taxes outstanding, you will have to pay those taxes. Many counties in North Carolina have passed local ordinances, or have obtained special legislation from the General Assembly requiring property taxes be paid prior to recording of a conveyance deed. That would include a deed to the highest bidder from the trustee. Therefore, its possible that the highest bidder will be forced to pay the taxes before he or she is able to record the deed from the trustee. Likewise the lender, if the high bidder, may be forced to pay the property taxes as well, before the trustee can record the trustee s deed. Many lenders would prefer not to expense the costs of the taxes, choosing rather to defer that costs until it has resold the property. In some counties however, that option is not available and the lender will be forced to pay those taxes before acquiring a deed to the property. Another notable exception to the cleansing effect of a foreclosure, deals with liens of the Internal Revenue Service. Unless given the required special notice, which is discussed later in this manuscript, an IRS lien may not be affected by the foreclosure and will remain a lien on the property even if that IRS lien was junior to the deed of trust being foreclosed. Assuming that the lender has decided to foreclose, there are a few preliminary steps to be taken. A. DEFAULT AND ACCELERATION LETTERS A deed of trust is nothing more than a contract between the parties. The lender is bound to the terms and conditions of the instrument just as the debtor. The first step in the foreclosure process is to determine if the debt is in default in such a manner that gives the lender the right to foreclose. 7

8 Historically, there has been no statutory requirement in North Carolina for a demand letter. If the deed of trust did not require one, there was no requirement that one be sent before foreclosure. However, effective November 1, 2010, newly enacted N.C.G.S , et seq. requires a 45 day pre-foreclosure letter on all Home Loans. N.C.G.S defines a Home Loan as a loan having all of the following characteristics: 1. A loan made to a natural person, not an entity; and 2. The purpose of the loan is for the borrower s personal, family or household use the loan is not for a commercial use, or for rental property; and a. The purpose of the loan is to purchase, repair, improve or construct a principal dwelling on which the real property is located; or b. To satisfy and replace a debt on the same real property; or c. To consolidate debt into a new home loan. 3. The loan is secured by an interest in the borrower s principal dwelling, which includes: a. A security interest in a mobile home; a mortgage or deed of trust securing an existing dwelling, or on which a dwelling will be built and upon completion, will be the principal dwelling of the borrower. However, a Home Loan is not an equity line of credit, construction loan, reverse mortgage, short-term bridge loan or a Jumbo Loan, even on the borrower s principal dwelling. 8

9 As of November 1, 2010, the mortgage servicer or lender must file information online about the delinquency of debt on a Home Loan. To determine whether a loan is a Home Loan, the Administrative Office of the Court generates a certificate, stating whether the loan is a Home Loan or Not a Home Loan through the North Carolina Commissioner of Banks website, If the loan is deemed a Home Loan, a written 45 day pre-foreclosure letter must be mailed to the last known address of the borrower within three days of filing on the Commissioner of Banks website. The letter must include much of the same information included in the 45 day notices for subprime loans: 1. Alternatives to foreclosure, listing contact information for the NC HUD-approved counseling agencies; and 2. Itemization of past due amounts which caused the default; and 3. Itemization of charges and fees necessary to bring the loan current; and 4. Contact information for the lender or servicer authorized to work with the borrower; and 5. Contact information for the North Carolina Commissioner of Banks (or if a credit union is the lender, the consumer complaint division of the Credit Union Division) The foreclosure petition may not be filed until the 45 day notice period on a Home Loan has elapsed. The foreclosure filing must include certification that the required 45 day pre-foreclosure notice was provided to the borrower and that the period has elapsed. The Clerk of Court in his Order of Foreclosure must also find whether the loan is Not a Home Loan, or if it is a Home Loan, that all requirements in the statute were met. Included in the filing should be the certificate stating the classification of the loan. 9

10 Even if the loan is not a Home Loan, the lender will often make the decision to send such a letter to see if the loan default can be cured so foreclosure can be avoided. If the deed of trust requires that a demand letter or other notice be mailed to the debtor, then the lender must do so before its right to foreclose becomes enforceable. The purpose of the demand letter is not only to provide the debtor with the opportunity to cure the default, but to inform the debtor that if the default is not cured, the debt will be accelerated. Once accelerated, the entire amount of the debt then becomes due and payable in full. The most common form of demand letter required by a deed of trust is one in which the lender informs the debtor of the default and gives the debtor a period of time to cure that default. Usually the deed of trust will require a 30-day cure period. Often, the deed of trust will limit this 30-day default provision to monetary defaults, thereby allowing immediate foreclosure if a default occurs that is not monetary in nature. An example would be if the debtor conveys the property without consent of the lender. This is a default under the terms of many deeds of trust, but no demand period is required because the only way to cure the default would be to have the property re-conveyed back to the debtor. Again, the terms of the deed of trust should be closely reviewed to determine when a demand letter is required. Occasionally you may run across a deed of trust that requires a shorter demand period than 30 days. It is advisable however in these circumstances to send a demand letter giving the debtor 30 days to cure the default. The Fair Debt Collections Practices Act ( FDCPA ), codified at 15 U.S.C. 1692, governs communications from debt collectors who are attempting to collect a consumer debt. The following definitions under the FDCPA are important: 1. A debt collector is defined as one whom: a. Uses any instrumentality of interstate commerce or the mails in any business the principal purpose of which is the collection of any debt; or b. Regularly collects or attempts to collect, directly or indirectly, the debts owed to another. 10

11 2. A Consumer is defined as: a. Any natural person obligated or allegedly obligated to pay any debt. 3. A Debt is defined as: See15 U.S.C. 1692a (2008). a. Any obligation or alleged obligation of a consumer to pay money arising out of a transaction in which the money, property, insurance, or services which are the subject of the transaction, are primarily for personal, family, or household purposes, whether or not such obligation has been reduced to judgment. Attorneys were originally exempted from the FDCPA but in 1986, the act was amended to cover attorneys. Therefore attorneys, and all others not collecting their own consumer debts, are considered debt collectors under the FDCPA and must comply with its provisions. One of the provisions requires that within five days of the first communication with the debtor, the debt collector must inform the debtor of the following: We assume that the debt described herein to a valid debt unless you contact us within 30 days of the receipt of this letter to dispute all or any portion of the debt. If you provide us with written notice of any dispute with regard to the debt, we will provide you with verification of the debt and a copy of the judgment, if any, which has been rendered against you. Within 30 days of our receipt from you of any such notice, we will provide you with the name and address of the original creditor, if different from the current creditor. Additionally, the FDCPA requires the debt collector provide the notice below to the debtor in the first written communication, or if the first communication is oral, in that oral communication: This is an attempt to collect a debt and any information obtained will be used for that purpose. In addition to the requirements of the FDCPA, Article 2 of Chapter 75 of the North Carolina General Statutes has been passed to regulate the acts of debt collectors. In any communication attempting to collect a debt, it is a deceptive debt 11

12 collection practice under N.C.G.S 75-54(2) to fail to inform the debtor that the purpose of the communication is to collect a debt. The following disclosure is therefore recommended in ALL communications with the debtor: This communication is from a debt collector. The purpose of this communication is to collect a debt. Case law interpreting the FDCPA holds that communications with a debtor will be construed in light most favorable to the most unsophisticated debtor. For example, if your demand letter only provides the debtor with fifteen days to cure the default, but the FDCPA allows the debtor thirty days to dispute the debt, a court could find that your letter was inconsistent and confusing to the most unsophisticated debtor. In order words, by sending a letter allowing for a cure period of less than thirty days, you could run afoul of the FDCPA. Therefore, if a demand letter is required, it should always provide for a thirty-day period to cure the default and it should include the disclosures required by the FDCPA and N.C.G.S 75-54(2). Every creditor attorney should review these statutes and understand the requirements of each. The FDCPA only applies to those who are collecting the debt of another. Therefore, if the lender sends its own demand letter, the FDCPA is inapplicable to that communication. N.C.G.S 75-54(2) however defines a debt collector as any person engaging directly or indirectly, in debt collection from a consumer. Therefore, a creditor collecting its own debt must comply with the provisions of this statute when attempting to collect its own receivables. It should be recognized that in our ever more complicated world, many creditors now act as a servicer for another creditor. The servicing creditor is considered a debt collector under the FDCPA. The FDCPA also is inapplicable to the collection of commercial debt. The Act only applies to collection of consumer debts, as is defined in the Act. 12

13 B. SUBSTITUTION OF TRUSTEE The deed of trust usually grants the lender the absolute right to remove and appoint a Substitute Trustee to take the place of the original trustee named in the instrument. Nothing prevents the original trustee from foreclosing the deed of trust but many times, the original trustee is either the closing attorney or sometimes even an officer or employee of the lender. If the lender desires to appoint a Substitute Trustee, it must record a Substitution of Trustee with the Register of Deeds. Once the instrument is recorded, the Substitute Trustee is conferred with all of the power and authority of the original trustee, including the authority to commence foreclosure. The Substitution of Trustee should be recorded with the Register of Deeds prior to the Substitute Trustee taking any action as trustee. Many Clerks of Court will refuse to enter a foreclosure order if they find that the Substitute Trustee filed the foreclosure action, or even dated the foreclosure pleadings, prior to being substituted as trustee. In such a case, it s possible that the foreclosure will have to be dismissed and re-filed, or the Clerk of Court may require that a new Notice of Foreclosure Hearing be filed and served. Therefore, in order to void any delay in the proceeding, make sure that the Substitution of Trustee is recorded with the Register of Deeds prior to any action being taken by the new trustee. Also, it is important to remember that the trustee is a fiduciary and cannot represent either party in the foreclosure action. If an attorney has been asked by the lender to send a demand letter to the debtor, that attorney should not be substituted as trustee until after the demand letter has been sent. Otherwise, the trustee could be deemed to have already breached his fiduciary duty by sending a demand letter on behalf of the lender while at the same time, serving as trustee under the deed of trust. C. FORECLOSURE OF PROPERTY ON BORROWERS IN ACTIVE MILITARY DUTY There are two different provisions that protect borrowers who are engaged in active military duty for the United States from power of sale foreclosure. Neither the language of the Servicemembers Civil Relief Act nor N.C.G.S A limit the property protected from foreclosure to a principal dwelling, and no mention is made of Home Loan determination. All types of property owned by the servicememberborrower are protected, including rental and commercial property. The clerk of court must find the borrower is not in active military duty in his findings. 13

14 The Servicemembers Civil Relief Act (50 U.S.C. App. 501 et seq.) temporarily suspends foreclosure proceedings to those members of the military who are in the active duty of the military with debt that originated prior to the beginning date active duty, and extends protection from foreclosure for 90 days after active military duty ends. All of the following requirements must be met for the Servicemembers Civil Relief Act to apply: See 50 U.S.C. App The relief sought is on a debt secured by a mortgage or deed of trust; and 2. The debt originated prior to the date active duty began; and 3. The property was owned by the servicemember or his dependent prior to the date active duty began; and 4. The property is still owed by the servicemember or his dependent at the time of filing; and 5. The servicemember s ability to pay the debt owed is materially affected by the servicemember s military service; and 6. The foreclosure petition is filed during, or within 90 days after the servicemember completes his active duty. If the servicemember obtained his mortgage after starting active military duty, the Servicemembers Civil Relief Act will not protect him by suspending a foreclosure proceeding. As of January 1, 2011, Chapter 45, Section 21 of the North Carolina General Statues offers more protection to borrowers serving in the military. N.C.G.S A supplements the Servicemembers Civil Relief Act, and bars power of sale foreclosures during or within 90 days after a debtor-servicemember s period of military service. This provision, like the Servicemembers Civil Relief Act, only applies to mortgages and deeds of trust that originated before the borrower s period of military service. The Department of Defense Manpower Data Center will issue an Active Military Status report online. The report will state whether the individual is in the active military, his start and end date, and service agency. If the individual is not in active duty, the report states the Department of Defense Manpower Data Center does not possess any information indicating the individual status. To search for an 14

15 individual debtor, go to All foreclosure petitions filed on or after January 1, 2011 must contain additional statements in the Notice of Hearing and Order of Foreclosure in compliance with this statute. See sections IV.C.19 and IV.F below. D. TITLE SEARCH Before beginning foreclosure, the trustee should have the title examined. Several issues need to be addressed by the examination: 1. Identify the name(s) of the current owners; 2. Identify junior lien holders, including junior deeds of trust and judgment creditors; 3. Identify any Request for Notices that have been filed by interested parties; 4. Identify any liens filed by the Internal Revenue Service; and 5. Identify any problems with the title before foreclosure is filed The title examination is also used to determine: 1. Those parties entitled to notice of hearing under N.C.G.S ; 2. Those parties entitled to notice of sale under N.C.G.S ; 3. Those parties entitled to notice of sale under Section N.C.G.S A; and 4. The existence of Federal Tax Liens, which are entitled to special notice pursuant to 26 U.S.C IV. THE FORECLOSURE HEARING Once the pre-foreclosure work has been accomplished, the demand has been sent and expired, the title updated, and the substitute trustee appointed, you are ready to commence the foreclosure action. 15

16 A. SETTING THE HEARING The first step is to schedule a hearing before the Clerk of Court in the county where the property is located. Telephone the Clerk of Court and request a hearing date and time. Once you have scheduled the hearing with the Clerk, a Notice of Hearing must be filed with the Court in order to initiate the action. While not required by the statutes, many attorneys will also file a Petition along with the Notice of Hearing. Subsection (a) of N.C.G.S provides that the mortgagee or trustee with the power of sale under a mortgage or deed of trust must file a notice of hearing with the clerk of court. The notice of hearing must: 1. Be served upon each party entitled to notice pursuant to N.C.G.S ; 2. Specify a time and place for the hearing before the clerk of court; and 3. Be served not less than 10 days prior to the hearing date (20 days for service by posting) B. PERSONS ENTITLED TO NOTICE OF THE HEARING Subsection (b) of N.C.G.S provides that the following persons are entitled to receive notice of hearing: 1. Any person required to be notified pursuant to the security instrument in the case of default. 2. Any person obligated to repay the debt that the holder of the security instrument intends to hold liable for a deficiency. (If the person is not notified then he or she will not be liable for any deficiency remaining after the sale) 3. All record owners of the real estate whose interest is of record in the county where the property is located at the time the notice of hearing is filed in that county. 16

17 Record Owner includes: 1. Any person owning a present or future interest in the real property whose interest is of record at the time the notice of hearing is filed and whose interest will be affected by the foreclosure proceeding. Record Owner does not include: 1. The trustee of a deed of trust; or 2. The owner or holder of a: a. Mortgage; b. Deed of trust; c. Judgment; d. Mechanic or materialman s lien; e. Other lien or security instrument in the real property; or f. Tenants in possession of the property under an unrecorded lease or rental agreement. C. CONTENTS OF NOTICE OF HEARING Subsection (c) of N.C.G.S requires the Notice of Hearing contain the following information: 1. The real estate security interest being foreclosed, with a description as is necessary to identify the real property, including the date, original amount, original holder, book and page of the security instrument. 2. The name and address of the holder of the security instrument at the time the notice of hearing is filed. 3. The nature of the default claimed. 4. The fact that the secured creditor accelerated the maturity of the debt. 17

18 5. Any right of the debtor to pay the indebtedness or cure the default. 6. A statement that the holder has confirmed in writing to the person giving the notice, or if the holder is giving the notice, the holder shall confirm in the notice, that, within 30 days of the date of the notice, the debtor was sent by firstclass mail at the debtor's last known address a written statement of the amount of principal and interest that the holder claims in good faith is owed as of the date of the written statement, a daily interest charge based on the contract rate as of the date of the statement, and the amount of other expenses the holder contends it is owed as of the date of the statement. 7. A statement that to the knowledge of the holder, or the servicer acting on the holder's behalf, whether in the two years preceding the date of the statement any requests for information have been made by the borrower to the servicer pursuant to G.S and, if so, whether such requests have been complied with. If the time limits set forth in G.S for complying with any such requests for information have not yet expired as of the date of the notice, the notice shall so state. NOTE: If the holder is not giving the notice, the holder shall confirm in writing to the person giving the notice the information required by this subsection to be stated in the notice; and 8. The right of the debtor (or other party served) to appear before the clerk of court at a time and on a date specified, at which appearance he shall be afforded the opportunity to show cause as to why the foreclosure should not be allowed to be held. 9. A statement that if the debtor does not intend to contest the creditor's allegations of default, the debtor does not have to appear at the hearing and that the debtor's failure to attend the hearing will not affect the debtor's right to pay the indebtedness and thereby prevent the proposed sale, or to attend the actual sale, should he elect to do so. 18

19 10. A statement that the trustee, or substitute trustee, is a neutral party and, while holding that position in the foreclosure proceeding, may not advocate for the secured creditor or for the debtor in the foreclosure proceeding 11. statement that the debtor has the right to apply to a judge of the superior court pursuant to G.S to enjoin the sale, upon any legal or equitable ground that the court may deem sufficient prior to the time that the rights of the parties to the sale or resale become fixed. 12. A statement that the debtor has the right to appear at the hearing and contest the evidence that the clerk is to consider under G.S (d) and that to authorize foreclosure, the clerk must find the existence of: (i) a valid debt which the party seeking to foreclose is the holder, (ii) a default under the deed of trust being foreclosed, (iii) the right to foreclose under the instrument, (iv) notice of the hearing was given to those entitled to notice, (v) the debt is classified as Not a Home Loan, or if it is a Home Loan, that pre-foreclosure notice was given and time requirements have elapsed, and (vi) N.C.G.S A does not bar foreclosure. 13. A statement that if the debtor fails to appear at the hearing, the trustee will ask the clerk for an order to sell the real property being foreclosed. 14. A statement that the debtor has the right to seek the advice of an attorney and that free legal services may be available to the debtor by contacting Legal Aid of North Carolina or other legal services organizations. 15. That if the foreclosure sale is consummated, the purchaser will be entitled to possession of the real estate as of the date of delivery of his deed, and that the debtor, if still in possession, can then be evicted. 16. The name, address, and telephone number of the trustee or mortgagee. 17. A statement that the debtor should keep the trustee or mortgagee notified in writing of his address so that he can be mailed copies of the notice of foreclosure setting forth the terms under which the sale will be held, and notice of any 19

20 postponements or resales. 18. That the hearing may be held on a date later than that stated in the notice and that the party will be notified of any change in the hearing date. 19. That the individuals being served are assumed not to be minors, incompetents or in the active military service of the United States. This statement must also include a request to notify the Substitute Trustee if the assumption is incorrect, and must state the foreclosure action may be barred by N.C.G.S A if the borrower, or his dependent, is on active military duty. NOTE: If the Notice of Hearing is also to serve as a notice of sale, then the Notice of Hearing must also contact all of the information required under N.C.G.S A. D. MANNER OF SERVICE OF NOTICE OF HEARING The Notice of Hearing is served in the same manner as service of summons under Rule 4 of the North Carolina Rules of Civil Procedure. See N.C. Gen. Stat. 1A-1, Rule 4 (2008). The Notice of Hearing therefore must be served in the following manner: 1. Rule 4(a) states that a proper person or sheriff in the county where service is being made must deliver the summons. A proper person in this State includes the sheriff of the county where the person(s) entitled to service is located or some other person authorized by law to serve a summons. Outside this State, a proper person is anyone who is at least twenty-one (21) years of age or anyone authorized by the law of the place where service is to be made to serve the summons.. 2. Rule 4(j) states: In an action commenced in a court in this State, the manner of service of process within or without the State shall be as follows: a. Serving a Natural Person with copies of the summons and compliant can be accomplished in any one of the following ways: 20

21 (1) Delivering copies to the person or by leaving copies at the defendant's house with a person of suitable age and discretion that lives in the house. (2) By delivering copies to an agent authorized by appointment or law to be served or to accept service of process or by serving process upon an agent or the party in a manner specified by any statute. (3) By mailing copies registered or certified mail, return receipt requested, to the party to being served. (4) By depositing with a designated delivery service authorized pursuant to 26 U.S.C. 7502(f)(2) copies addressed to the party being served and obtaining a delivery receipt. 3. A Natural Person under Disability can be served in any one of the ways listed in section (j) and, in addition, where required by paragraph a or b below: a. Serving Minors When the person is a minor service must also be made upon: (1) A parent or guardian having custody of the child. (2) If there is not a parent or guardian, upon any other person having the care and control of the child. (3) If there is no parent, guardian, or other person having care and control of the child, then upon a guardian ad litem. b. Knowledge vs. No knowledge of a guardian: (1) If the plaintiff knows that a person under disability is under guardianship of any kind, process must be served separately upon the guardian. 21

22 (2) If the plaintiff does not know that a guardian has been appointed when service is made upon a person known to be incompetent, then service must be made upon the guardian ad litem. 4. A Domestic or Foreign Corporation can be served the summons and compliant in any one of the following ways: a. By delivering copies to an officer, director, or managing agent of the corporation or by leaving copies with the person in charge of the office. b. By delivering copies to the agent. c. By mailing copies registered or certified mail, return receipt requested, addressed to the officer, director, or agent. d. By depositing copies with a designated delivery service authorized pursuant to 26 U.S.C. 750(f)(2) and obtaining a delivery receipt. 5. A General or Limited Partnership can be served in the same ways as a Domestic or Foreign Corporation except service should be made upon a general partner, attorney-infact or agent. In addition, if relief is sought against a particular partner, then copies must be served upon the partner as provided in section (j). 6. Other Unincorporated Associations or Their Officers can be served in the same ways as a Domestic or Foreign Corporation. In addition to serving an officer, director, or managing agent, a member of the governing body can also be served. 7. Posting Notice instead of Notice by Publication: Notice by publication is authorized pursuant to Rule 4 of the North Carolina Rules of Civil Procedure. However, in a foreclosure proceeding, notice can be given by posting when notice by publication would be authorized. See N.C. Gen. Stat (a) (2007). The rule states that if service upon a party cannot be accomplished after a reasonable and diligent effort notice may be given to the party 22

23 by posting the notice in a conspicuous place and manner upon the property no less than twenty (20) days prior to the date of hearing. Additional service rules: 1. Service by posting may run concurrently with any other attempt to serve. 2. The notice must be posted by the sheriff. 3. If service is obtained by a posting, an affidavit must be filed with the clerk of court to show that the circumstances warranted the use of service by posting. When a party entitled to notice is not served or is not timely served prior to the hearing date, the following rules apply: 1. The clerk of court shall Order the hearing continued to a date and time no less than ten (10) days from the date of the original hearing; 2. The notices already served in a timely manner remain effective; 3. The mortgagee or trustee must follow the notice requirements to properly serve the parties who were not timely served with respect to the original hearing; and 4. The parties timely served in the original hearing that do not have actual notice of the time and date of the new hearing must be sent an order of continuance by first-class mail at his or her last known mailing address. See N.C. Gen. Stat (a) (2007). In other words, if there are two debtors and one is properly served with the Notice of Hearing and the other is not, the hearing must be continued. The debtor who was properly served will remain served, and the trustee is required only to mail that debtor a notice of the continuance by first-class mail. As for the debtor who was not served, or was not timely served, that debtor must be served with a new Notice of Hearing in the manner required by N.G.C.S (a). 23

24 Often, service will be obtained by the Sheriff posting the Notice of Hearing on the subject property. As with service by publication under Rule 4, service by posting is only considered sufficient service if service was attempted on the debtor by the other permitted methods and was unsuccessful. Rule 4, subsection (j1) allows for service by publication on a party that cannot with due diligence be served by personal delivery, registered or certified mail, or by a designated delivery service authorized pursuant to 26 U.S.C. 7502(f)(2) Therefore, before service by posting will be accepted by the Clerk of Court in a foreclosure action, the trustee must show that he or she has attempted service by all other means and was unsuccessful. It could be construed that due diligence in today s computer age would include some sort of search for the debtor via the Internet. There are numerous websites available for such a search, including those provided by various phone companies and the U.S. Postal Service. Also, Lexus/Nexus is a useful search tool if you have access to it. In other words, the trustee should not simply conclude that the debtor cannot be located but rather, the trustee has a duty to make a reasonable search for the debtor s address where he or she can be served. It is advisable to attempt service at all possible addresses by all methods permitted by Rule 4. In other words, you should attempt service at each address through (1) the sheriff, (2) certified mail and (3) overnight delivery. If these attempts at service are unsuccessful, posting would then be sufficient service on the debtor. See Barclays Am./Mortgage Corp. v. B.E.C.A. Enters., 116 N.C. App. 100, 446 S.E. 2d. 883 (1994). For service by posting to be valid, the Sheriff is only permitted to post the property being foreclosed upon. If you have more than one address for the debtor, you should request the Sheriff attempt service at both addresses and if unsuccessful, to post the subject property. Posting at a location other than the property being foreclosed is insufficient service. As Subsection (a) of N.C.G.S provides, the various attempts at service can run concurrently with one another. Therefore, while the Sheriff is attempting to serve the Notice of Hearing, the trustee is permitted to attempt service by certified mail and by overnight delivery at the same time. 24

25 If service is accomplished by posting, the trustee is required to file an affidavit with the court justifying the service by posting. That affidavit should verify to the Clerk of Court the other methods utilized by the trustee to obtain service i.e.: via certified mail and overnight delivery. You may find that as the hearing date approaches, the certified mail receipt has not yet been returned by the postal service. The same may be true for the receipt or verification from the overnight carrier. It is useful in those instances to search the website for the postal service and the overnight carrier. The postal service website allows you to check the status of the certified mail by typing in the certified mail receipt number. You can print that document and attach it to your affidavit to verify to the Clerk of Court that service was attempted and was unsuccessful. The same can be done for the overnight carriers by searching their respective websites. If a person other than the debtor signs a certified mail or overnight delivery receipt, that person is presumed by law to be the agent for the debtor. Therefore, you do not have to obtain the debtor s signature on these receipts in order to obtain sufficient service. Only a signature is required. The presumption can be rebutted by the debtor, but this is rarely done. See Fender v. Deaton, 130 N.C. App. 657, 503 S.E.2d. 707 (1998); Goins v. Puleo, 350 N.C. 277, 512 S.E.2d. 748 (1999). E. WRITTEN STATEMENT REQUIRED BY N.C. GEN STAT (c)(5a) With respect to the requirements set out in Subsection (c)(5a) of N.C.G.S , the holder of the deed of trust is required, within 30 days of the date of the Notice of Hearing, to mail a written statement to the debtor providing the information required by that provision of the statute. See N.C. Gen. Stat (c)(5a) (2007). According to the statute, the written statement must be sent to the debtor within 30 days of the date of the notice. In other words, the statement must be sent by the lender prior to the date of the Notice of Hearing. Therefore, it is important to review the statement to make sure that the date it was mailed to the debtor was not more than 30 days prior to date of the Notice of Hearing. If it was, then a new statement should be sent. 25

26 The question often arises as to whether the attorney can send out this written statement. The specific language of the statute provides that the holder has confirmed in writing to the person giving the notice, that the statement was mailed. Therefore, it would appear that the person giving the notice, if other than the holder, cannot send the written statement. Rather the holder must send the statement. Certainly, the holder s attorney could send the statement but it s questionable whether the trustee could do so, given the specific language of the statute. F. CONDUCTING THE HEARING The hearing is held before the Clerk of Court. Since the trustee is a fiduciary, he or she cannot represent the interest of either party at the hearing. Typically, in lieu of testimony, the lender will execute an affidavit to be presented to the Clerk. This affidavit is usually offered to the Clerk by the trustee. In February of 2005, the Administrative Office of the Court issued guideline for the appearance of non-lawyers at foreclosure hearings. It is established law that a corporation cannot represent itself in a court proceeding. Lexis Nexis v. Travishan Corp. 155 N.C. App. 205, 573 S.E.2d 547 (2002). Therefore, a corporation appointed as trustee is required to obtain counsel to represent it at the hearing. It became common practice for some law firms however, to send paralegals or other non-lawyers to the hearing to represent the trustee. Usually, the paralegal would appear before the Clerk for the purpose of presenting the documentation in support of the foreclosure. Many attorneys argued that this was the unauthorized practice of law, since only a licensed attorney can represent the interest of another in a court proceeding. The AOC has now established a policy that paralegals may not represent the trustee at a foreclosure hearing. It is now required that a trustee represent himself or herself at the hearing, or obtain counsel for that purpose. If the debtor appears at the hearing and contests the validity of the affidavit, or the allegations therein, it may be necessary to have the hearing continued in order to allow the lender to obtain counsel to represent its interest. Most of the time, if a hearing becomes contested, the Clerk of Court will allow such a continuance. 26

27 Clerk: Subsection (d) of N.C.G.S provides that at the hearing before the 1. The clerk of court has a duty to consider the evidence of the parties and the clerk may consider: a. Affidavits; b. Certified copies of documents; and c. Other forms of evidence required or permitted by law. 2. The clerk of court has a duty to authorize the mortgagee or trustee to proceed with the foreclosure if the clerk finds the existence of the following: a. The party seeking to foreclose is the holder of a valid debt; and b. The debt is in default; and See N.C. Gen. Stat (d) (2011). c. The deed of trust contains a right of foreclosure upon default; and d. Notice has been given to those entitled to notice pursuant to N.C.G.S ; and e. Whether the debt has been classified as Not a Home Loan, or if the loan is a Home Loan, that the pre-foreclosure notice requirement was provided and the period of time has elapsed; and f. The sale is not barred by N.C.G.S A. If the Clerk finds that the four issues above exist, then the Clerk is required to enter an order allowing the trustee to sell the property. The ruling of the Clerk is a judicial act and can be appealed. 27

28 V. APPEAL OF THE DECISION OF THE CLERK OF COURT Subsection (d1) of N.C.G.S provides: The act of the clerk under N.C.G.S (d) is a judicial act; therefore, the act may be appealed to a district or superior court judge within 10 days after the act of the clerk of court. The standard of review on appeal is de novo. If a party decides to appeal, the appealing party must post a bond with sufficient surety as determined by the clerk to ensure that the opposing party is protected from any probable loss because of the appeal. Once the bond is posted, the clerk must stay the foreclosure pending the appeal. If an appeal is taken from the decision of the Clerk, the statute allows for the appeal to be heard at the next available session of court. Subsection (e) of N.C.G.S provides that either party has the right to demand that the appeal be heard at the next term of the court that convenes 10 or more days after the hearing before the clerk. See N.C. Gen. Stat (e) (2007). The appeal hearing takes precedence over the trial of other cases except: 1. Cases of exceptions to homestead; 2. Appeals in summary ejectment actions; or 3. Other cases in the discretion of the judge. In a county where no session of the court is scheduled within 30 days from the date of the hearing before the clerk, either party may petition any authorized regular or special superior court judge in the district, or assigned to hold court in the district where any part of the real estate is located, or the chief district judge where any part of the real estate is located, to hear the appeal. VI. WAIVER OF HEARING In rare occasions, or in situations where there is a friendly foreclosure, a debtor may decide to waive the right to a hearing before the Clerk of Court. The debtor could also agree to execute a consent order, whereby the debtor consents to 28

29 the Clerk of Court entering a foreclosure order. Such a waiver and consent to foreclosure is permissible under certain statutory stipulations. Subsection (f) of N.C.G.S provides the following circumstances where a party can waive his or her right to notice and a hearing: In a case where the original principal balance of the secured debt is one hundred thousand dollars ($100,000.00) or more, any person entitled to notice and hearing may waive his or her right to notice and hearing by duly acknowledging and signing a written instrument. In all other cases, any time after the notice of hearing is served, the trustee or mortgagee may request the Clerk of Court mail a form to all of the other parties entitled to notice that will allow them to waive their right to the hearing. If the form is returned to the Clerk with the party s signature witnessed by someone other than an agent or employee of the mortgagee or trustee, then the Clerk may in his or her discretion, dispense with the hearing as to that party and issue the order authorizing the sale. See N.C. Gen. Stat (f) (2007). VII. FORECLOSURE SALE Once the hearing before the Clerk has been conducted and an order allowing the property to be sold has been entered, the next step is to serve, post and publish the Notice of Sale. N.C.G.S A and of the North Carolina General Statutes govern these steps. A. THE CONTENTS OF THE NOTICE OF SALE N.C.G.S A requires that the notice of sale contain the following: 1. Describe the instrument that is the subject of the sale by identifying the original mortgagors and recording data. If the record owner is different from the original mortgagors, the notice must also list the record owner of the property on record with the register of deeds not more than 10 days prior to posting the notice. The notice may also reflect the owner not on the records if known; 29