1. Mortgages--foreclosure--assignment--no default based solely on earlier default
The trial court did not err in a foreclosure action by its findings and conclusions that Azalea Garden
Board and Care, Inc. (Azalea) did not default under its deed of trust assigned to WRH Mortgage, Inc. (WRH)
based solely on Azalea's earlier default on a debt to Housing and Urban Development, because WRH purchased
the debt under new terms with a new default provision.
2. Mortgages--foreclosure--de novo hearing
The trial court in the appeal of a foreclosure action is to conduct a de novo hearing to determine the same
four issues determined by the clerk of court, including: (1) the existence of a valid debt of which the party
seeking foreclosure is the holder; (2) the existence of default; (3) the trustee's right to foreclosure under the
instrument; and (4) the sufficiency of notice of hearing to the record owners of the property.
3. Mortgages--foreclosure--default--modification of deed of trust--compromise and settlement
agreement
The trial court erred in denying WRH Mortgage Inc.'s right to foreclosure by finding no default by
Azalea Garden Board and Care, Inc. under the deed of trust, because the trial court improperly determined the
rights of the parties under the deed of trust only when the provisions of the original promissory note, modified by
the compromise and settlement agreement and the amended plan of reorganization, also apply.
4. Collateral Estoppel and Res Judicata--collateral estoppel--issue not precluded
The trial court was not barred by collateral estoppel in a foreclosure action from hearing evidence
concerning factual disputes relating to whether Azalea Garden Board and Care, Inc. (Azalea) had performed its
obligations under the compromise and settlement agreement executed by the parties even though WRH contends
those disputes had previously been litigated in the Bankruptcy Court, because: (1) the Bankruptcy Court
determined the issue of whether Azalea was in compliance with its confirmed plan of reorganization and lifted the
automatic stay allowing WRH to proceed with the foreclosure action in state court; and (2) the state foreclosure
action determined the issue of whether Azalea was in default under the promissory note and deed of trust.
5. Mortgages--foreclosure--equitable defenses--acceptance of late payments
The trial court erred in a foreclosure action by considering the equitable defense of acceptance of late
payments in its findings and conclusions that no default had occurred, because equitable defenses to foreclosure
may not be raised in a hearing under N.C.G.S. § 45-21.16, but must instead be asserted in an action to enjoin the
foreclosure sale under N.C.G.S. § 45-21.34.
Northen Blue, L.L.P., by J. William Blue, Jr., for petitioner-appellant.
Tuggle Duggins & Meschan, P.A., by Robert C. Cone, for respondent-
appellee.
McGEE, Judge.
The issue on appeal is whether the trial court erred in finding that
Azalea Garden Board and Care, Inc. (Azalea) did not default under its deed of
trust assigned to WRH Mortgage, Inc. (WRH), and therefore WRH could not
foreclose on the deed of trust. Azalea is a North Carolina corporation that
owns and operates Brookside Gardens, a rest home in Winston-Salem, North
Carolina. Azalea executed a promissory note on 28 December 1989 to First
Union Mortgage Corporation in the amount of $2,838,200 and a deed of trust on
the rest home real property as security for the note. The promissory note
was amended on 22 July 1991 and again on 16 March 1994. The promissory note
and deed of trust were assigned to the Secretary of Housing and Urban
Development (HUD) on 10 April 1995. HUD initiated foreclosure proceedings in
early 1996 after Azalea defaulted on the debt.
Azalea filed a Chapter 11 bankruptcy petition in the United States
Bankruptcy Court for the Middle District of North Carolina on 24 February
1997 and filed a plan of reorganization on 2 July 1997. WRH purchased
Azalea's note and deed of trust from HUD for $1,700,000 on 29 July 1997. In
a compromise and settlement agreement effective 1 October 1997, Azalea agreed
to satisfy its debt to WRH by: (1) monthly payments of $20,000, beginning on
or before 1 November 1997, (2) lump sum payment to WRH of $2,750,000 on or
before 31 December 1998, and (3) execution of a new promissory note for
$150,000 to be paid over five years, secured by a deed of trust on the real
property. Azalea then signed an amendment to the plan of reorganization of
the debtor in possession on 8 October 1997, which included a provision that
Azalea would execute and deliver to its attorney a deed in lieu of
foreclosure on or before 5 November 1997 to be held in escrow by Azalea's
attorney for delivery to WRH in the event of a default under the plan of
reorganization. WRH voted to accept the plan as amended and the Bankruptcy
Court approved the amended plan by an order entered 12 November 1997.
WRH notified Azalea in a letter dated 28 January 1998 that "WRH
considers the Debtor to be in default under the applicable agreements, butmay be willing to defer the exercise of its remedies without waiv
ing the
default under certain conditions." In response, Azalea sought review of its
conduct by the Bankruptcy Court by filing a motion requesting a determination
that Azalea had complied with its obligations under the compromise and
settlement agreement. In a hearing on 24 March 1998, the Bankruptcy Court
determined that "the Debtor is in default under the various terms and
conditions of the Plan as amended and . . . the terms and conditions of the
Settlement Agreement were incorporated into the Plan amendment by reference."
The Bankruptcy Court concluded in an order dated 1 April 1998 that "WRH is
entitled to proceed with foreclosure[.]"
Azalea appealed the order of the Bankruptcy Court to the United States
District Court for the Middle District of North Carolina. In a memorandum
opinion entered 7 December 1998, the United States District Court determined
the Bankruptcy Court had subject matter jurisdiction to enter the 1 April
1998 order, and that "the Bankruptcy Court's factual findings [were] not
clearly erroneous and thus must be applied to the law to determine whether adefault occurred." The court concluded that there was a d
efault by Azalea
under the amended plan and agreement, and that WRH was entitled to foreclose
on the property. Azalea appealed to the United States Court of Appeals for
the Fourth Circuit, which affirmed the District Court in an order entered 31
May 2000. The Fourth Circuit Court of Appeals rejected Azalea's challenge to
the Bankruptcy Court's jurisdiction and Azalea's arguments and noted that
Azalea "does not dispute the supporting facts" underlying its decision that
Azalea defaulted.
WRH filed this action before the Clerk of Superior Court in Forsyth
County on 15 May 1998, pursuant to N.C. Gen. Stat. § 45-21.16, to commence
foreclosure against the rest home property. A hearing was held before an
assistant clerk of Superior Court on 16 June 1998 and in an order dated 22
June 1998, the clerk made findings of fact, including
[t]hat the Debtor is in default under the Note and
Deed of Trust as modified for the following reasons:
a. Failure to make timely installment paymen
ts of
principal and interest;
b. Failure to pay ad valorem property taxes
as
they become due;
c. Failure to deliver specific financial rep
orts
requested by WRH; and
d. Failure to maintain insurance on the real
property described in the Deed of Trust.
Azalea filed notice of appeal to Forsyth County Superior Court. Following a
hearing, the trial court entered an order on 17 September 1998 finding no
default by Azalea under the deed of trust and denying WRH's right to
foreclose against the real property. WRH appeals from this order.
In its appeal to our Court, WRH argues the trial court erred in finding
no default by Azalea under the deed of trust and in denying WRH the right to
foreclose. WRH specifically argues the trial court erred: (I) in its
findings of fact and conclusions of law that no default had occurred in light
of the prior acknowledgment by Azalea that it was in default and otherevidence of default; (II) in hearing evidence concerning factual disp
utes as
to whether Azalea had performed its obligations under the compromise and
settlement agreement when those disputes had previously been litigated in
Bankruptcy Court; (III) in considering equitable defenses raised by Azalea
that no default had occurred; and (IV) in finding no right to foreclose
existed under the deed of trust in light of the plain language of the deed of
trust.
&
nbsp;I.
[1]WRH first argues the trial court erred in its findings and
conclusions that no default had occurred because Azalea "had previously
acknowledged it was in default of its obligations and all of the other
competent evidence before the trial court indicated that Azalea was in
default of its obligations." WRH further contends that Azalea may not
"assert a particular position in an action and then assert a contrary
position in subsequent proceedings after having accepted the benefits of its
first position."
Prior to 29 July 1997, the day WRH purchased the note and deed of trust
from HUD, Azalea had already filed its bankruptcy petition and filed a plan
for reorganization. The amendment to the plan of reorganization was dated 2
July 1997, at which time HUD still held Azalea's note and deed of trust. WRH
subsequently purchased the note and deed of trust from HUD and executed a
compromise and settlement agreement with Azalea effective 1 October 1997.
The compromise and settlement agreement expressly states that "the Debtor has
sought protection under the provisions of Chapter 11 . . . by filing a
petition with the United States Bankruptcy Court" and "the note and deed of
trust are in default[.]" Knowing these facts, WRH purchased Azalea's debt
and created a payment schedule by which Azalea would pay WRH.
The compromise and settlement agreement stated that "the parties hereto
have now negotiated, agreed, and announced to the Court a settlement of thisdispute whereby, with appropriate further orders of the Court,
the claims of
WRH will be treated in the manner set forth below." The compromise and
settlement agreement further stated that "[i]n the event the Debtor fails to
timely pay . . . or fails to comply with any other provision of this
Agreement . . . WRH may proceed with its rights and remedies under the Loan
Documents." We are not persuaded by WRH's argument that Azalea is in default
under their agreement merely because Azalea was earlier in default on a debt
to HUD, a debt that WRH purchased under new terms with a new default
provision.
[2]We next determine whether other competent evidence before the trial
court indicated that Azalea was in default of its obligations as argued by
WRH. Our Supreme Court has stated that the trial court in the appeal of a
foreclosure action is to conduct a de novo hearing to determine the same four
issues determined by the clerk of court: (1) the existence of a valid debt of
which the party seeking foreclosure is the holder, (2) the existence of
default, (3) the trustee's right to foreclose under the instrument, and (4)
the sufficiency of notice of hearing to the record owners of the property.
In re Foreclosure of Goforth Properties, Inc., 334 N.C. 369, 374, 432 S.E.2d
855, 858 (1993). The applicable standard of review on appeal where, as here,
the trial court sits without a jury, is whether competent evidence exists to
support the trial court's findings of fact and whether the conclusions
reached were proper in light of the findings. Walker v. First Federal
Savings and Loan, 93 N.C. App. 528, 532, 378 S.E.2d 583, 585, disc. review
denied, 325 N.C. 320, 381 S.E.2d 791 (1989).
The order of the trial court states that "[f]oreclosure of the Deed of
Trust is not permissible under Chapter 45 of the North Carolina General
Statutes." The trial court's order reviewed the reasons WRH argued it was
entitled to foreclose and found that:
(10) Except for [the 22 July 1991 and 16 March 1994
amendments], the Deed of Trust has not been amended. Theconfirmed amended plan did not amend the Deed of Trust.
WRH, Azalea and the trustee under the Deed of Trust did
not execute any instrument modifying or purporting to
modify the Deed of Trust.
. . .
(12) Nothing in the Deed of Trust requires that any
monthly financial statements or other monthly reports be
provided by Azalea to WRH.
. . .
(15) Azalea was current on all of the Monthly Payments as
of May 13, 1998, two (2) days prior to commencement of
the foreclosure proceeding on May 15, 1998.
. . .
(18) At the time foreclosure was commenced, there were in
fact no unpaid delinquent ad valorem taxes due on the
Real Property, and there are no delinquent ad valorem
taxes owing at this time.
. . .
(22) At the time foreclosure was commenced, the Real
Property was in fact covered by insurance and such
coverage remains in effect.
Five documents set out the rights of the parties in this case: (1) the
original 1989 promissory note from Azalea to First Union Mortgage
Corporation, (2) the 1989 deed of trust securing that promissory note, (3)
the plan of reorganization in Bankruptcy Court filed 2 July 1997, (4) the
compromise and settlement agreement effective 1 October 1997, and (5) a
subsequent amendment to the plan of reorganization accepted by WRH and
approved by the Bankruptcy Court in an order entered 12 November 1997.
First, the original 1989 promissory note from Azalea to First Union
Mortgage Corporation, and later transferred to HUD, evidences the actual
indebtedness of Azalea. Second, the accompanying deed of trust is
"essentially a security" by which "the legal title to real property is placed
in one or more trustees, to secure the repayment of a sum of money or the
performance of other conditions." Black's Law Dictionary 414 (6th ed. 1990).
A deed of trust gives the note holder a contractual remedy for default,namely a right to foreclose under the instrument. In re Foreclos
ure of
Burgess, 47 N.C. App. 599, 603, 267 S.E.2d 915, 918 (1980). The power of
sale in a deed of trust is "a contractual arrangement in a mortgage or a deed
of trust which 'confer[s] upon the trustee or mortgagee the "power" to sell
the real property mortgaged without any order of court in the event of a
default.'" In re Foreclosure of Michael Weinman Associates, 333 N.C. 221,
227, 424 S.E.2d 385, 388 (1993) (citing James A. Webster, Jr., Webster's Real
Estate Law in North Carolina § 281, at 331 (Patrick K. Hetrick & James B.
McLaughlin, Jr. eds., 3d ed. 1988)).
Third, the plan of reorganization specifies that "[t]he documents
securing the loan remain in full force and effect, subject to the
forbearances specifically provided for in this Plan with respect to
enforcement of the loan documents." Fourth, the compromise and settlement
agreement between Azalea and WRH, signed after Azalea defaulted on its
obligation to HUD and after WRH purchased the promissory note, states that
the parties "have now negotiated, agreed, and announced to the Court a
settlement of this dispute whereby . . . the claims of WRH will be treated in
the manner set forth below." Fifth, the subsequent amendment to the plan of
reorganization specifically states that the compromise and settlement
agreement "will be incorporated into the Plan as Amended as a part of the
Court's Order Confirming the Plan as Amended."
[3]WRH contends, and we agree, that in this case the promissory note,
modified by the compromise and settlement agreement and amended plan of
reorganization, imposes payment obligations on Azalea as the debtor.
Where a [subsequent] contract involves the same subject
matter as the first, but where no recission has occurred,
the contracts must be construed together in identifying
the intent of the parties and in ascertaining what
provisions of the first contract remain enforceable, and
in such construction the law pertaining to interpretation
of a single contract applies.
In re Foreclosure of Fortescue, 75 N.C. App. 127, 130, 330 S.E.2d 219, 221(1985) (citation omitted) (applying terms of a loan modifi
cation agreement to
find default of promissory note and foreclosure of deed of trust). "The
court's primary purpose in construing a contract is to ascertain the
intention of the parties." Id. at 130, 330 S.E.2d at 222; see also In re
Foreclosure of Sutton Investments, 46 N.C. App. 654, 659-60, 266 S.E.2d 686,
689 (1980) ("[W]e conclude initially that proper interpretation of the
provisions in the Note and the Deed of Trust prescribing the conditions of
default requires that the instruments be read together as one contract rather
than as two independent agreements."). The compromise and settlement
agreement and the amended plan of reorganization set new, specific
requirements that the parties in this case intended to follow, in addition to
any agreements in the original promissory note and deed of trust, that were
not irreconcilable. The issue for determination is whether Azalea defaulted
under the original promissory note, modified by the compromise and settlement
agreement and the amended plan of reorganization, thus entitling WRH to
foreclose under the deed of trust.
WRH specifically contends that Azalea was clearly in default for: (1)
failure to submit to WRH required monthly financial reports for at least
three months; (2) mailing its February 1998 payment on 9 February 1998,
causing WRH to receive the payment after the 10 February due date; (3)
leaving a $488.65 deficit in property tax liabilities; (4) allowing insurance
on the rest home to lapse due to nonpayment of premiums; and (5) failure to
submit by 5 November 1997 a deed in lieu of foreclosure to be held in escrow
by its attorney, which the parties had agreed upon in order to secure
Azalea's performance under the compromise and settlement agreement and
amended plan of reorganization.
As to the monthly financial reports, Azalea counters that "[w]hile it is
clear that [it] . . . did provide detailed financial information on a monthly
basis, [the trial court] correctly found . . . that nothing in the Deed ofTrust required that any monthly financial statements or other mon
thly reports
be provided[.]" Azalea states, "Obviously . . . WRH was relying upon
language in the Compromise Agreement." The provisions of the compromise and
settlement agreement are valid, and Azalea provides no support for the
contention that it provided detailed financial information on a monthly
basis. Appearing in the record is a letter dated 8 December 1997, in which
WRH requested from Azalea several financial reports. WRH named three
specific financial reports that had not been received for September and
October 1997, and six specific reports that had not been received for
November 1997 and subsequent months.
Azalea next argues that "WRH contended that the payment for February had
been received two (2) days late, but there was no contention that this
payment had been late by a month or more, as required [for a finding of
default] by Paragraph 10 of the Deed of Trust." One of the detailed
provisions of the compromise and settlement agreement between the parties
reached in Bankruptcy Court instructs Azalea to produce $20,000 payments "on
or before the 10th day of each month[.]" Additionally, the amendment to the
plan of reorganization provides "Azalea Gardens has agreed to make an
adequate protection payment to WRH in the amount of $20,000.00 . . . on or
before the 10th day of each month beginning in December, 1997[.]" Azalea
does not claim it paid the February amount at a time that would have
permitted WRH to receive it on or before 10 February 1998 as agreed. The
boilerplate language in the deed of trust securing a note originally owed to
First Union Mortgage Corporation and then to HUD does not contain the full
agreement between Azalea and WRH. The compromise and settlement agreement
and plan of reorganization that were negotiated, amended and ratified by the
parties in this case modified the original documents as in In re Foreclosure
of Fortescue, 75 N.C. App. at 129-130, 330 S.E.2d at 221.
Azalea further contends "the evidence clearly show[s] . . . at the timethe foreclosure was commenced on May 15
, 1998, there were in fact no unpaid
delinquent ad valorem taxes due . . . nor were there any delinquent ad
valorem taxes owing at the time of the [trial court] hearing [of 21 August
1998]." Azalea cites no evidence in the record to support such contention.
The amendment to the plan of reorganization provides "Azalea Gardens agrees
to pay ad valorem property taxes as they become due during the term of its
payment agreement with WRH." In the record on appeal, a billing statement
from the office of the Forsyth County Tax Collector dated 21 August 1997
indicates a total liability of $24,432.38 due on 1 September 1997, and past
due on 6 January 1998. A receipt dated 28 January 1998 indicates a remaining
balance due of $488.65.
With regard to payment of insurance premiums, Azalea insists WRH did not
follow the terms of the deed of trust that required Azalea be notified of
"the pending lapse" in coverage, nor did WRH pay the premiums and make demand
for reimbursement in the event the debtor failed to pay the premiums.
However, the compromise and settlement agreement provides that "the Debtor
shall . . . maintain insurance upon the Property, which shall name WRH as an
additional insured[.]" The compromise and settlement agreement does not
provide that WRH give notice to Azalea when coverage may terminate, nor does
it provide for payment by WRH and subsequent demand for reimbursement. A
notice of cancellation in the record dated 10 February 1998 states "[o]ur
records indicate that your premium payment was not received by the due date
[of 31 January 1998]. The policy described herein is canceled for non-
payment of premium effective . . . 03/01/98." A handwritten notation
indicates that the policy was canceled on 4 March 1998.
We believe the trial court erred in determining the rights of the
parties under the deed of trust only, when the provisions of the original
promissory note, modified by the compromise and settlement agreement and the
amended plan of reorganization, also apply. We hold the trial court's orderdenying WRH's right to foreclose by finding no default by Azale
a under the
deed of trust was in error.
II.
[4]WRH contends the trial court erred in "hearing evidence concerning
factual disputes relating to whether Azalea had performed its obligations
under the compromise and settlement agreement executed by the parties when
those disputes had previously been litigated in the Bankruptcy Court."
Through this argument WRH seeks the application of collateral estoppel to
prevent the trial court from making determinations it contends the Bankruptcy
Court had already adjudicated.
Although mutuality of parties is no longer required when invoking either
offensive or defensive collateral estoppel, the parties in the case before us
are clearly the same in both actions. Rhymer v. Estate of Sorrells, 127 N.C.
App. 266, 488 S.E.2d 838 (1997). "Having decided that the parties are the
same, we must next determine whether another requirement for the application
of collateral estoppel--identity of issues--is present." King v. Grindstaff,
284 N.C. 348, 358, 200 S.E.2d 799, 806 (1973).
In determining whether collateral estoppel is applicable
to specific issues, certain requirements must be met: (1)
The issues to be concluded must be the same as those
involved in the prior action; (2) in the prior action,
the issues must have been raised and actually litigated;
(3) the issues must have been material and relevant to
the disposition of the prior action; and (4) the
determination made of those issues in the prior action
must have been necessary and essential to the resulting
judgment.
Id. (citations omitted); see also State v. Summers, 351 N.C. 620, 528 S.E.2d
17 (2000) (citing Grindstaff and enumerating same four requirements for
identity of issues).
We focus on the first requirement that "[t]he issues to be concluded
must be the same as those involved in the prior action[.]" King, 284 N.C. at
358, 200 S.E.2d at 806. Generally in the bankruptcy proceeding, Azalea
sought a determination from the Bankruptcy Court that it was in compliancewith its confirmed plan of reorganization. The Bankruptcy Court
entered an
"[o]rder denying the motion by debtor for determination of compliance with
the terms of the debtor's confirmed plan of reorganization" on 1 April 1998.
According to the order, the result was that "WRH is entitled to proceed with
foreclosure and WRH is entitled to receive all documents that Debtor's
counsel presently holds in escrow."
The role of the Bankruptcy Court was to determine whether Azalea was in
compliance with its plan of reorganization. WRH contended Azalea had failed
to comply and that it was entitled to relief from the automatic stay in order
to pursue its claims against the rest home property that was security for
Azalea's debt. See 11 U.S.C. § 362(d). While the automatic stay is in
effect, a creditor cannot pursue the bankruptcy debtor for a money judgment
on any debt listed in the bankruptcy petition. Such protection serves as an
injunction against enforcing the personal obligation of the debtor but it
does not affect a security interest that a debtor has voluntarily given in
property to secure the payment of a debt.
During the bankruptcy proceedings, a creditor can move for relief from
stay in order to pursue property that is security for a debt. 11 U.S.C. §
362(d). Once a motion for relief from stay is granted to a creditor, the
creditor is free to foreclose on its security interest in the property.
However, the Bankruptcy Court in this case had no jurisdiction over the
foreclosure action and could not have granted a decree of foreclosure. The
Bankruptcy Court appropriately considered the issue brought before it by
Azalea for a determination of whether Azalea was in compliance with its
confirmed plan of reorganization. The Bankruptcy Court also determined the
relief sought by WRH for an "Order in Aid of Consummation" entitling WRH to
receive a deed in lieu of foreclosure and for the stay to be lifted allowing
WRH to proceed with a foreclosure action in state court. WRH was free to
proceed with the foreclosure action in state court as soon as the stay ofproceedings against the real property was lifted in Bankruptcy Cou
rt.
In the state foreclosure action, Azalea argued no default occurred under
the deed of trust and WRH could not foreclose. The procedure for foreclosure
of a deed of trust is governed principally by N.C. Gen. Stat. § 45-21.16,
providing that "[i]f the clerk finds the existence of (i) valid debt of which
the party seeking to foreclose is the holder, (ii) default, (iii) right to
foreclose under the instrument, and (iv) notice . . . then the clerk shall
authorize [foreclosure]." N.C. Gen. Stat. § 45-21.16(d) (1999). A hearing
was held before the Forsyth County Clerk of Superior Court resulting in a
determination that Azalea was in default under the promissory note and deed
of trust. Azalea appealed to Forsyth County Superior Court and the trial
court entered an "[o]rder finding no default under deed of trust and denying
right to foreclose." The order states that "[f]oreclosure of the Deed of
Trust is not permissible under Chapter 45 of the North Carolina General
Statutes."
In order for collateral estoppel to apply in this case, the issues to be
concluded must be the same as those in the prior Bankruptcy Court action, and
as shown above, the issues determined by the trial court were not the same as
those determined by the Bankruptcy Court. See Edmundson Investment Company
v. Florida Treco, Inc., 633 S.W.2d 599 (Tex. App.-Hous. 1982) (not same
distinct issue in Bankruptcy Court, where issue was whether property could be
removed from under the stay, and in state court, the issue was foreclosure).
The Bankruptcy Court in the Chapter 11 proceeding and, in turn, the
clerk of court and the trial court in the state foreclosure proceeding
appropriately carried out their required consideration of the issues before
each court. Collateral estoppel did not preclude each court from considering
the appropriate issues before it.
&
nbsp;III.
[5]WRH's third argument is that the trial court erred in consideringequitable defenses raised by Azalea with regar
d to its findings and
conclusions that no default had occurred.
Legal defenses which negate any of these requisite
findings [(the four factors set out in N.C.G.S. § 45-
21.16)] are properly considered at this hearing. . . .
[T]o preclude presentation of legal defenses to the four
requisites to authorization of sale would render the
hearing provided by this statute a largely purposeless
formality.
In re Foreclosure of Deed of Trust, 55 N.C. App. 373, 375-76, 285 S.E.2d 615,
616, aff'd, 306 N.C. 451, 293 S.E.2d 798 (1982); see also In re Foreclosure
of Godwin, 121 N.C. App. 703, 705, 468 S.E.2d 811, 812 (1996). The mortgagor
in In re Foreclosure of Fortescue, 75 N.C. App. at 131, 330 S.E.2d at 222,
contended that the trial court erred in finding default because "even if
respondent-appellant tendered payments after they were due, the lender waived
its right to prompt payment by accepting late payments[.]" Our Court
determined this was an equitable defense and held that "equitable defenses
[to foreclosure] may not be raised in a hearing pursuant to G.S. 45-21.16,
but must instead be asserted in an action to enjoin the foreclosure sale
under G.S. 45-21.34." Id. (citations omitted); In re Foreclosure of Godwin,
121 N.C. App. at 705, 468 S.E.2d at 813; accord Meehan v. Cable, 127 N.C.
App. 336, 339, 489 S.E.2d 440, 442-43 (1997); In re Watts, 38 N.C. App. 90,
94, 247 S.E.2d 427, 429 (1978). "Equitable defenses to foreclosure, such as
waiver of the right to prompt payment through acceptance of late payments
must be asserted in an action to enjoin the foreclosure sale [.]" Meehan,
127 N.C. App. at 340, 489 S.E.2d at 444 (emphasis omitted) (citing In re
Foreclosure of Goforth Properties, Inc., 334 N.C. 369, 374, 432 S.E.2d 855,
859 (1993)).
In the case before us, the order of the trial court tends to show the
court considered an equitable defense of Azalea when the order stated that
"[e]ven if Azalea had been late by more than one (1) month on any particular
payment, any such timing default was waived by WRH's accepting MonthlyPayments prior to commencement of the foreclosure proceeding and ther
eafter."
An equitable defense of acceptance of late payment was considered by the
trial court even though the trial court did not specifically state it used
equity in reaching its decision. "Although a Superior Court Judge has
general equitable jurisdiction, N.C. Const. Art. IV, § 1, Hospital v. Comrs.
of Durham, 231 N.C. 604, 58 S.E.2d 696 (1950), a court is without
jurisdiction unless the issue is brought before the court in a proper
proceeding." In re Watts, 38 N.C. App. at 94, 247 S.E.2d at 429 (citations
omitted). Judicial economy and efficient resolution of disputes would be
well served in this case if the trial court could determine equity in the
foreclosure proceeding; however, equitable defenses must be determined
pursuant to the procedure set forth in N.C. Gen. Stat. § 45-21.34 (1999).
The trial court erred in considering an equitable defense to foreclosure,
which Azalea must pursue through an action to enjoin the foreclosure based on
that equitable defense.
Based upon our determination of WRH's first three arguments, it is not
necessary for us to review its final argument. The order of the trial
court denying WRH's right to foreclose by finding no default by Azalea is
reversed. Reversed and remanded for action by the trial court consistent
with this opinion.
Judges JOHN and HUNTER concur.
Judge John concurred in this opinion before 31 August 2000.
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