Link to original WordPerfect file
1. Estoppel--piercing corporate veil--clean hands
The trial court did not err by refusing to pierce the corporate veil in an action to
determine possession of a tract of land where defendant contended that the trial court should
have disregarded plaintiff's corporate form to determine the true nature of the parties and their
interests and should not have granted summary judgment for plaintiff. Defendants were aware
of the defects in the title when they purchased the property, used the defects in the title as
leverage in negotiations, and may not resort to equitable principles. Equity is for the protection
of innocent persons and is a tool used by the court to intervene where injustice would otherwise
result.
2. Deeds--real property--bona fide purchaser for value
The trial court did not err in an action concerning possession of land by determining that
one of defendants' predecessors in title was not a bona fide purchaser for value without notice
of any defects in the chain of title where a 1969 deed was presumptively invalid on its face and
an inquiry by the purchaser would have disclosed that the conveyance was not open and above
board.
3. Adverse Possession--ejectment claim--determined in prior action
An ejectment action was not barred by an adverse possession claim where the issue of
adverse possession had been raised, argued, and determined by the Court of Appeals in a prior
action.
4. Appeal and Error--preservation of issues--cross-assignment of error
A cross-assignment of error concerning an N.C.G.S. § 1-111 bond was proper where
defendants argued that the trial court's order did not deprive plaintiff of an alternative ground for
summary judgment, but the decision may have deprived plaintiff of an alternative basis in law
for supporting the judgment.
5. Ejectment--defense bond--not a condition precedent to filing an answer
The trial court did not err in an ejectment action by granting defendants' motion for leave
to file a defense bond. The trial court has discretion to extend the time for filing an N.C.G.S. §
1-111 bond and to allow filing of the bond after the answer has been filed. Posting a defense
bond is not a condition precedent to filing an answer; the requirement of a defense bond was
never intended to be used to require forfeiture on technical grounds by a party having merit to its
argument. Appeal by defendants from order entered 18 February 1998 by
Judge Howard E. Manning, Jr. in Hyde County Superior Court.
Heard in the Court of Appeals 29 March 1999.
This action concerns the possession of a tract of land in
Hyde County, North Carolina. In March 1969, the plaintiff, Swan
Quarter Farms, Inc. (“SQF”) was the owner of the property. At
that time, SQF was owned in equal . shares by shareholders A.H.
Van Dorp, Mary Van Dorp and Fred Poore. On 31 March 1969 SQF, by
and through its President, Mr. Van Dorp, and its Secretary, Mrs.
Van Dorp, executed a deed dated 25 March 1969 purporting to
convey the property to Mrs. Van Dorp individually.
On 18 October 1972, the Van Dorps signed a note and deed of
trust to Federal Land Bank (“Federal”) to secure a $100,000 loan
to the Van Dorps. On 5 September 1975 the Van Dorps signed
another note and deed of trust to Federal, this time to secure a
$208,000 loan. On 18 January 1983 Federal made an advancement on
the 1975 deed of trust in the amount of $247,000. On 25 July
1988, Federal began foreclosure proceedings on the 1975 deed of
trust. The foreclosure sale was held on 2 December 1988 and
Federal bid the sum of $470,000. No upset bids were filed and a
deed was executed to Federal for the property on 14 December
1988.
Meanwhile, in 1983, Mr. Poore had filed suit against SQF and
the Van Dorps seeking to invalidate the 1969 transfer from SQF to
the Van Dorps. In 1989, this Court determined that the 1969
transfer of the deed from SQF to the Van Dorps was presumptively
invalid. Poore v. Swan Quarter Farms, Inc., 95 N.C. App. 449,450, 382 S.E.2d 835, 836 (1989), disc. review denied, 326 N.C.
50, 389 S.E.2d 93 (1990). This Court also determined that “the
plaintiffs were entitled to rely on the presumption of invalidity
of the corporate deed, and the defendants' failure to offer any
evidence to rebut the presumption mandates voiding of the 25
March 1969 deed.” Id. at 451, 382 S.E.2d at 836 (emphasis
added).
At the time of this Court's 1989 decision, Poore still owned
a . share in SQF, and the remaining . shares were owned by the
Van Dorps. Mrs. Van Dorp passed away on 28 September 1991. In
consideration of legal services, Mr. Van Dorp, acting as executor
of Mrs. Van Dorp's estate and individually, transferred to Lee E.
Knott the Van Dorps' shares in SQF in April of 1992.
On 7 May 1992, defendants Roger A. Spencer and family
purchased both Poore's share in SQF as well as Poore's interest
in the land by way of quitclaim deed. The Spencers also
purchased Federal's interest in the land by special warranty deed
in which Federal warranted that it had done nothing to impair
title in the property since it received it. Lawyers' Title
Insurance Corporation provided an owner's title insurance policy
to the Spencers for the $460,000 purchase price without
exceptions to the claims of SQF, the Van Dorps or the Poores.
On 27 October 1995 SQF instituted this action to eject the
Spencers from the property. On 22 December 1995 the Spencers
answered denying SQF's right to possession. SQF then filed a
Motion to Strike the Answer for failure of defendants to post the
bond required by G.S. 1-111. Pursuant to a consent order enteredwithout prejudice to SQF's Motion to Strike the [Spencer's]
Answer, the Spencers filed an amended answer on 12 July 1996. On
2 December 1996 the Spencers moved for summary judgment. On 15
April 1997 the Spencers filed a motion for leave to file defense
bond or alternatively for relief from failure to file the G.S. 1-
111 defense bond. On 15 May 1997 SQF moved for summary judgment.
On 18 February 1998, the trial court denied defendants'
motion for summary judgment and granted summary judgment to SQF,
determining that SQF was “the owner in fee simple of the property
which is the subject of this action and entitled to immediate
possession of the property.” The trial court also granted
defendants' motion to file a defense bond. Upon posting the
defense bond required by G.S. 1-111, defendants appealed. In
addition, SQF cross-assigned as error the trial court's
determination allowing defendants to file the defense bond.
Hornthal, Riley, Ellis and Maland, by L. P. Hornthal, Jr.
and M. H. Hood Ellis, for plaintiff-appellee.
Moore & Van Allen, PLLC, by David E. Fox and Christopher J.
Blake, for defendant-appellants.
EAGLES, Chief Judge.
[1]/A HREF>We first consider whether the trial court erred in
granting plaintiff's motion for summary judgment because the
trial court should have disregarded the plaintiff's corporate
form to determine the true nature of the real parties and their
interests. Defendants contend that if the trial court had
examined the plaintiff rather than relying on plaintiff'scorporate identity, “the trial court would have found Mr. Knott
seeking to reap an economic windfall as a result of the Van
Dorps' prior self-dealing and breaches of fiduciary duty.”
Accordingly, defendants argue that “Mr. Knott should be estopped
from suing in SQF's name and using the Van Dorp's self-dealing
and the accompanying statutory presumption to defeat the
Spencers' claims to possession of the Property.” Defendants
argue that the Van Dorps would have been estopped from relying on
their own improper conduct to maintain this action. Defendants
argue that it follows that Mr. Knott, as the Van Dorps'
successor, should not possess any greater right to sue in SQF's
name. Defendants rely on Bangor Punta Operations v. Bangor & A.
R. Co., 417 U.S. 703, 41 L.Ed.2d 418 (1974) and Park Terrace,
Inc. v. Burge, 249 N.C. 308, 106 S.E.2d 478 (1959) in seeking
that the corporate form be disregarded based on equitable
principles.
Plaintiff argues that the Spencers cannot claim the benefit
of equitable defenses because of their “unclean hands.”
Plaintiff asserts that the Spencers bought the property with
their “eyes wide open” and used the “legal problems” related to
the property's title to obtain concessions on purchase price and
title insurance. Plaintiff argues that estoppel is for the
benefit of innocent persons and that defendants could not create
an estoppel by their own actions. Plaintiff also distinguishes
the cases relied upon by defendants, arguing that the equitable
rules proclaimed in those cases have no application where the
corporation is proceeding at law to recover title to its propertywrongfully acquired through fraud and overreaching by an officer
and shareholder. Plaintiff argues that “[a]ny other rule would
countenance the fraudulent acquisition of corporate property.”
Plaintiff finally argues that the Spencers' pleadings
procedurally bar the Spencers' attempts to disregard the
corporate entity because the Spencers did not specifically plead
an estoppel or alter ego defense in their Answer.
We hold that defendants cannot claim the benefit of
equitable defenses. “'The corporate veil may be pierced to
prevent fraud or to achieve equity.'" Harrelson v. Soles, 94
N.C. App. 557, 561, 380 S.E.2d 528, 531 (1989)(quoting Glenn v.
Wagner, 313 N.C. 450, 454, 329 S.E.2d 326, 330 (1985)). Equity
is for the protection of innocent persons and is a tool used by
the court to intervene where injustice would otherwise result.
See Cunningham v. Brigman, 263 N.C. 208, 211, 139 S.E.2d 353, 355
(1964)(only innocent persons may claim the benefit of equitable
estoppel). Here, defendants were aware of the defects in the
title when they purchased the property. In fact, the defendants
used the defects in the title as leverage in negotiations with
Federal to obtain concessions on price and title insurance. The
defendants protected themselves in the transaction and they may
not resort to equitable principles to protect themselves from any
fraud. Accordingly, we hold that the trial court did not err by
refusing to pierce the corporate veil. The assignment of error
is overruled.
[2]We next consider whether defendants' predecessors in
title were bona fide purchasers for value without notice of anydefects in the chain of title. Defendants argue that the trial
court erred when it determined that Federal was not a bona fide
purchaser without notice of the invalidity of Mrs. Van Dorp's
title to the property. Defendants contend that the trial court
incorrectly held that the 1969 deed conveying the property to
Mrs. Van Dorp charged Federal with actual and constructive notice
of a fatal defect in its chain of title. In doing so, defendants
argue that the trial court failed to make a critical distinction
between a deed that is void on its face and one that is voidable.
Defendants contend that a voidable deed is sufficient to pass
title to a bona fide purchaser for value, but a void deed is not.
Beam v. Almond, 271 N.C. 509, 520, 157 S.E.2d 215, 224 (1967).
Defendants assert that Federal had no actual or constructive
notice of any imposition, undue advantage or actual or
constructive fraud in connection with the 1969 deed. Defendants
contend that although this Court correctly held that conveyances
of corporate property to corporate officers are subject to a
judicial presumption of invalidity, the trial court erred when it
determined that the presumption rendered the 1969 deed void
rather than merely voidable. Defendants argue that “unless or
until an action was commenced challenging the 1969 deed, it was
merely voidable, not void, and the judicial presumption against
validity had no meaning or application.” Defendants note that no
action to void the 1969 deed was taken until 1983, while Federal
loaned substantial sums to the Van Dorps in 1972 and 1975.
Defendants additionally argue that had Federal conducted a
reasonable inquiry, it would not have disclosed any fatal defectin the 1969 deed because “the corporate records revealed complete
shareholder and director approval.” Accordingly, defendants
assert that Federal was a bona fide purchaser for value with no
notice of any defect in the chain of title, and defendants are
entitled to be protected as a grantee to Federal's innocent
purchaser status.
Plaintiff first argues that as a matter of law, the 1969
deed by which defendants claim title is invalid as a matter of
law because “the undisputed facts and evidence completely and
conclusively establish the very basis for the presumptive
invalidity of the 1969 deed and the fact that the presumption
could not be rebutted under the circumstances surrounding the
deed.” Plaintiff asserts that the trial court properly
determined that based on the undisputed facts of record, the 1969
deed was invalid as a matter of law and was null and void.
Accordingly, plaintiff asserts that defendants have no title to
the property unless defendants or their predecessors in interest
acquired the property as an innocent or bona fide purchaser for
value without notice of the infirmity. Plaintiff next argues
that both the Spencers and their predecessor in interest,
Federal, had actual and constructive notice of the defect in the
deed and neither qualify for protection as bona fide purchasers
for value without notice. Plaintiff argues that the “vitiating
or corrupting fact appears on the face of the record and the 1969
deed which Mrs. Van Dorp signed to herself as an officer of SQF.”
Plaintiff argues that the 1969 deed was presumptively invalid and
defendants were charged with notice of the defect appearing onthe face of the deed. At the very least, plaintiff argues that
the “vitiating fact” appearing on the face of the deed was
sufficient to put Federal “on notice of all matters which a
reasonable inquiry would have disclosed.” Plaintiff asserts that
Federal did not undertake a reasonable inquiry. Accordingly,
plaintiff argues that the trial court correctly held that Federal
was not a bona fide purchaser for value without actual or
constructive notice of the defect, and Spencer did not take title
free of the defect.
After careful consideration of the record, briefs and
contentions of both parties, we affirm. Where “an innocent
purchaser conveys to one who has notice, the latter is protected
by the former's want of notice and takes free of the equities.”
Morehead v. Harris, 262 N.C. 330, 342, 137 S.E.2d 174, 185
(1964)(citing Arrington v. Arrington, 114 N.C. 151, 19 S.E. 351
(1894)). Here, it is not disputed that defendants had notice of
the defects in title when it purchased the subject property. The
issue is whether their predecessor in title, Federal, was a bona
fide purchaser for value without notice of the defect in the
title. We find that defendants are not entitled to protection as
a bona fide purchaser for value without notice because Federal
cannot claim protection as a bona fide purchaser for value
without notice.
Defendants are correct in their contention that the 1969
deed was merely voidable and not void on its face. “The purchase
or lease of the property of a corporation by an officer or
director of a corporation renders the transaction voidable, notvoid, and such transaction will be upheld only when open, fair,
and for sufficient consideration.” Youth Camp v. Lyon, 20 N.C.
App. 694, 697, 202 S.E.2d 498, 500 (1974)(citing 19 C.J.S.
Corporations § 775, p. 137). This Court has already recognized
the “presumption of invalidity of the deed” in this case. Swan
Quarter Farms, 95 N.C. App. at 450, 382 S.E.2d at 836. This
Court also determined that “the plaintiffs were entitled to rely
on the presumption of invalidity of the corporate deed, and the
defendants' failure to offer any evidence to rebut the
presumption mandates voiding of the 25 March 1969 deed.” Id. at
451, 382 S.E.2d at 836. However, this Court did not void the
deed until 1989, and when the deed was conveyed to Federal in
1972, it was still merely voidable. The issue then becomes
whether Federal was a bona fide purchaser for value without
notice when it acquired the voidable deed in 1972. The key to
determining this issue is Federal's notice. The 1969 deed was
presumptively invalid on its face. By law, Federal was charged
with “notice of every fact affecting [its] title which an
accurate examination of the title would disclose.” Waters v.
Phosphate Corp., 310 N.C. 438, 442, 312 S.E.2d 428, 432
(1984)(citing Hensley v. Ramsey, 283 N.C. 714, 199 S.E.2d 1
(1973)). Here, an inquiry by Federal would have disclosed that
the 1969 conveyance was not “open and above board.” First, based
on undisputed facts in the record, the conveyance of the 1969
deed was for far less than adequate consideration. The recorded
deed showed that “[t]he sum of $5.00 in excise tax or stamps was
affixed to the deed as recorded. In 1969, this representedconsideration of between $4,500 and $5,000 ($0.50 per $500).”
However, a balance sheet dated in 1967 in Federal's loan file for
SQF showed the property was worth at least $135,000, and evidence
indicates the property may have been worth as much as $282,750 in
1969. Additionally, there was evidence in the record that Mr.
Poore was not aware of the 1969 transfer and did not consent to
it. The trial court found that the transaction “was not fairly
and openly authorized, was not free from oppression, and lacked
full disclosure and fair dealing because of the Van Dorps'
fiduciary relationship as officers of SQF.” Accordingly, we
hold that Federal could not claim status as a bona fide purchaser
for value without notice and defendants are not protected by any
bona fide purchaser without notice status. The assignment of
error is overruled.
[3]We next consider whether plaintiff's ejectment claim is
barred because the Van Dorps acquired title to the disputed
property by adverse possession pursuant to G.S. 1-38. Defendants
contend that Mrs. Van Dorp satisfied all the requirements for
adverse possession. First, defendants argue that Mrs. Van Dorp
entered the property under color of title because she took
possession of the property in the good faith belief that she held
good title to the property. Defendants assert that Mrs. Van Dorp
did not have a fraudulent intent at the time she executed the
1969 deed. Second, defendants contend that Mrs. Van Dorp
satisfied all of the other requirements for adverse possession.
She took possession on 1 April 1969, and her possession was
continuous, adverse, hostile and exclusive. Defendants note thatthe Van Dorps exclusively determined who would farm the property
and collected the rents and profits. Defendants additionally
note that Mrs. Van Dorp's adverse possession was never tolled
since no action was filed or pending prior to 31 March 1976.
Defendants argue that defendants' claim of adverse possession was
erroneously precluded by the trial court because the issue of
adverse possession was never raised in any prior litigation.
Additionally, defendants contend that Mrs. Van Dorp's fiduciary
relationship with SQF does not preclude title by adverse
possession. Defendants argue that “even if some quasi-trust
relationship existed, it was repudiated by clear and unequivocal
acts” by Mrs. Van Dorp, and all shareholders of SQF had actual
notice of the adverse claim no later than 1 August 1973.
Plaintiff argues that the issue of Mrs. Van Dorp's adverse
possession was adjudicated adversely to Mrs. Van Dorp in Poore v.
Swan Quarter Farms, Inc., 79 N.C. App. 286, 291, 338 S.E.2d 817,
820 (1986), disc. review denied, 326 N.C. 50, 389 S.E.2d 94
(1990)). In that case, plaintiff contends that Mrs. Van Dorp
asserted a claim of superior title to the property by adverse
possession. In reversing an order for summary judgment and
remanding the case for trial, this Court noted that “the
pleadings also fail to disclose sufficient facts and
circumstances to permit judgment on the pleadings based on either
estoppel or adverse possession.” Id. Upon remand and after
trial on the merits, plaintiff asserts that this Court found that
title to the property remained in SQF. The Court stated that its
“previous opinions clearly establish that defendant Swan QuarterFarms, Inc. is the owner in fee simple of the property in
dispute. . . .” Poore v. Swan Quarter Farms, Inc., 119 N.C. App.
546, 550, 459 S.E.2d 52, 54 (1995)(citing Poore v. Swan Quarter
Farms, Inc., 111 N.C. App. 546, 434 S.E.2d 251
(1993)(unpublished)). Plaintiff argues that pursuant to the
opinions of this Court, final judgment was entered therein
adjudicating SQF as the sole owner in fee simple. Plaintiff
argues that even if this were not so, defendants' claim would
still fail as a matter of law. Plaintiff contends that the Van
Dorps could not claim color of title because Mrs. Van Dorp could
not enter into possession of the land in good faith. Plaintiff
cites the presumption of fraud arising from the relationship of
Mrs. Van Dorp and SQF, and asserts that good faith demands
undivided loyalty to the corporation and prohibits self-dealing
to the detriment of the corporation and its shareholders.
Plaintiff argues that given the relationship, any possession by
Mrs. Van Dorp is deemed the possession by SQF in the absence of
an unqualified and unequivocal disavowal. Plaintiff asserts that
recording of the 1969 deed is not sufficient to constitute
disavowal. Additionally, plaintiff argues that the knowledge of
Mrs. Van Dorp, as an officer of SQF, is not imputed to SQF where
she was acting for herself and adversely to the interests of SQF.
Accordingly, plaintiff argues that the claim of adverse
possession fails as a matter of law. We find plaintiff's
arguments persuasive.
The issue of adverse possession was raised as an affirmative
defense by SQF in its answer to Mr. Poore's complaint in SwanQuarter Farms, 79 N.C. App. at 287, 338 S.E.2d at 818. A final
judgment in that action was rendered in Poore v. Swan Quarter
Farms, Inc., 94 N.C. App 530, 380 S.E.2d 577 (1989) in which SQF
prevailed. This Court reiterated its determination that SQF held
title to the property in fee simple in Swan Quarter Farms, 119
N.C. App. at 550, 459 S.E.2d at 54 (citing Swan Quarter Farms,
111 N.C. App. at 546, 434 S.E.2d at 251 (unpublished)).
Accordingly, the trial court did not err in determining that the
issue of adverse possession had been “raised and argued” and had
been determined by this Court. The assignment of error is
overruled.
[4]We last consider whether the trial court's order
settling the record on appeal incorrectly allowed plaintiff to
include cross-assignments of error. Defendants argue that
plaintiff's purported cross-assignments of error did not properly
preserve for appeal the question of whether the trial court erred
in denying plaintiff's Motion to Strike and granting defendants'
Motion for Leave to File Defense Bond. Defendants argue that at
most “the trial court's rulings . . . deprived SQF of a basis for
obtaining a default judgment against Appellants, not an
alternative basis for supporting summary judgment.” Defendants
assert that the proper procedure would have been for plaintiff to
file a cross-appeal, not cross-assignments of error.
On the merits of plaintiff's cross-assignment of error,
defendants argue that the trial court properly exercised its
discretion in allowing defendants to file a G.S. 1-111 defense
bond. Defendants contend that North Carolina courts have heldthat the bond requirement may be waived, and that the statute
requiring it has been treated with considerable leniency.
Defendants additionally argue that in cases where an answer has
been filed without bond and has remained on file without
objection, it would be improper for the trial judge to strike the
answer and render judgment for the plaintiff without notice or
without giving defendant the opportunity to file a defense bond.
Defendants assert that the trial court's decision here “avoided
exactly the type of forfeiture on technical grounds which the
North Carolina Supreme Court” has criticized.
Plaintiff contends that the cross-assignment of error was
proper pursuant to Rule 10(d) of the North Carolina Rules of
Appellate Procedure. Plaintiff cites Barbour v. Little, 37 N.C.
App. 686, 247 S.E.2d 252, disc. review denied, 295 N.C. 733, 248
S.E.2d 862 (1978). In Barbour, on an appeal from a grant of
summary judgment in favor of defendants, this Court held that the
trial court's denial of defendants' motion to dismiss pursuant to
Rule 12(b)(6) was properly preserved for appeal by defendants'
cross-assignment of error. Plaintiff argues that Barbour is
indistinguishable from the case here. On the merits, plaintiff
argues that “no basis for exercise of the Court's discretion has
been shown” and that defendants' answer should have been stricken
and judgment entered for plaintiff. Plaintiff asserts that
posting a G.S. 1-111 defense bond is required as a condition
precedent to filing answer and defending the action.
We affirm. Plaintiff's argument that it has properly
preserved this issue for appeal by cross-assignment of error ispersuasive. Defendants argue that the trial court's order did
not deprive plaintiff of an alternative ground for summary
judgment. However, the trial court's decision may have deprived
plaintiff of an alternative basis in law for supporting the
judgment. Accordingly, pursuant to Barbour, cross-assignment of
error pursuant to Rule 10(c) was sufficient to properly preserve
this question for appellate review.
[5]On its merits, however, the assignment of error is
overruled. A number of cases indicate that the trial court has
discretion to extend the time for filing a G.S. 1-111 defense
bond and to allow filing of the bond after the answer has been
filed. Dunn v. Marks, 141 N.C. 232, 53 S.E.2d 845 (1906).
Additionally, “our Supreme Court has held that the requirement
[of posting bond] may be waived and has treated the statute with
considerable leniency.” Gates v. McDonald, 1 N.C. App. 587, 588,
162 S.E.2d 143, 144 (1968). Accordingly, posting a defense bond
is not a condition precedent to filing an answer. Additionally,
our research indicates that the requirement of a defense bond was
never intended to be used to require forfeiture on technical
grounds by a party having merit to its argument. Accordingly,
the cross-assignment of error is overruled.
Affirmed.
Judges JOHN and EDMUNDS concur.
*** Converted from WordPerfect ***