Mortgages_foreclosure_application of proceeds_authority of
trustee
A judgment from superior court and an order from the clerk
of superior court resolving a dispute over a trustee's
application of the proceeds of a foreclosure sale were vacated
where the trustee paid $102,587.50 for the removal of the
mortgagors' personal property and $9,619.68 in attorney fees.
The payments in dispute fall under N.C.G.S. § 45-21.31(a) and are
in the sole province of the trustee; neither the clerk nor the
superior court had statutory authority to review the trustee's
proposed application of the proceeds of the foreclosure sale or
to allow, disallow, or modify the amount of such proposed
payments. A party wishing to challenge payments made pursuant to
the statute may do so in a separate proceeding against the
trustee for a breach of fiduciary duty once the payments have
been made, and a trustee seeking guidance may institute a
declaratory judgment action.
Trimpi, Nash & Harman, L.L.P., by John G. Trimpi, for
mortgagor-appellant/appellee Ralph O. Webber.
Pritchett & Burch, PLLC, by Lloyd C. Smith, Jr. and Lars P.
Simonsen, for substitute trustee-appellant/appellee William W.
Pritchett, Jr.
Irvine Law Firm, PC, by David J. Irvine, Jr. and Stephanie B.
Irvine, for mortgagor-appellant/appellee Nancy A. Webber.
HUNTER, Judge.
This case involves a dispute over a trustee's proposed
application of the proceeds of a foreclosure sale. William W.
Pritchett, Jr. (“the trustee”) sought pre-approval from the clerk
of superior court of certain costs, expenses, and obligationsassociated with the foreclosure sale of certain property. Ralph O.
Webber and his wife Nancy A. Webber (together “the mortgagors”),
owners of the property prior to the sale, raised objections to
certain of these proposed payments before the clerk of superior
court. The clerk of superior court held a hearing and entered an
order, the parties appealed from the clerk's order, and the
superior court addressed the merits of the dispute and entered
judgment. We hold that neither the clerk of superior court, nor
the superior court on appeal, had statutory authority to approve,
disapprove, or modify these proposed payments, or to rule on
whether the trustee breached his fiduciary duties, and we therefore
vacate the judgment of the superior court and the order of the
clerk of superior court.
We begin with a brief synopsis of the pertinent facts and
procedural history. On 11 March 1988, the mortgagors executed a
deed of trust upon a parcel of land located in Chowan County, North
Carolina, in favor of The Federal Land Bank of Columbia. The deed
of trust was subsequently assigned to AgFirst Farm Credit Bank
(“the mortgagee”). At some point in time, the mortgagors defaulted
on the promissary note secured by the deed of trust, thereby
triggering a right to foreclose on the part of the mortgagee. In
September of 1998, Mr. Pritchett, a licensed attorney in North
Carolina, was appointed as the substitute trustee. Prior to the
final foreclosure sale, which occurred on 2 June 1999, Perley
Andrew Thomas contacted the trustee and conditioned his willingness
to bid upon the trustee's assurance that the trustee would be
responsible for removing Mr. Webber and his personalty from theproperty if Mr. Thomas became the high bidder. The trustee agreed
to this condition and, after numerous upset bids, Mr. Thomas became
the high bidder.
The property was conveyed to Mr. Thomas on 2 September 1999.
At that time Mr. Webber still had not removed himself or his
personalty from the property. Mr. Webber ultimately removed
himself from the property but left a significant amount of
personalty on the premises, including horses, dogs, cats,
inoperable vehicles, over 200 scrap tires, batteries, barrels, oil
tanks, lumber, cans of paint, furnishings, books, and clothing.
The trustee hired Thurman Price, a private contractor, to remove
Mr. Webber's personalty. Mr. Price removed the personalty over the
next three weeks, employing between ten and fifteen workers, a
front-end loader, an excavator, and a bulldozer. Mr. Price billed
the trustee for 526 hours of labor and the use of the machinery for
a total of $102,587.50. Mr. Price also removed and temporarily
stored twenty-nine horses, and charged $33,860.00 for storing,
feeding and care for the horses.
In October of 1999, the trustee made an “interim payment” of
$50,000.00 to Mr. Price. Later that month, prior to making any
other payments from the proceeds of the sale, the trustee filed a
proposed “Final Report and Account of Foreclosure Sale,” seeking
pre-approval by the clerk of superior court of the payments he
intended to make, including: $102,587.50 for the removal of Mr.
Webber's personalty from the property by Mr. Price; approximately
$8,000.00 for the care of approximately thirty horses removed from
the property; and $12,000.00 in legal fees. The clerk held ahearing on the matter, and entered an order on 24 November 1999
approving all expenses except (1) the attorney's fees, which were
reduced to $9,000.00, and (2) the fees for the removal of Mr.
Webber's personalty, which were disallowed. The trustee, Mr.
Webber, and Mrs. Webber appealed from this order to the superior
court.
Following a hearing on 14 March 2000, the superior court
entered an order containing findings of fact and conclusions of
law, including: that the court had jurisdiction to hear the appeal
and to conduct a hearing de novo on the merits; that the clerk did
not exceed his authority in approving certain expenses and
disallowing others; that the trustee did not breach his fiduciary
duty by promising Mr. Thomas that he would remove Mr. Webber and
his personalty from the property, or by hiring Mr. Price to remove
the personalty; that the expenses of $102,587.50 for removal of the
personalty and $33,860.00 for storage and care of the horses should
be approved; and that the attorney's fees should be increased from
$9,000.00 to $9,619.68. From this order, the mortgagors and the
trustee appeal.
The proper procedure for the application of the proceeds of a
foreclosure sale is set forth in Chapter 45, Article 2A of our
General Statutes and is divided into two stages. At the first
stage, pursuant to subsection (a) of N.C. Gen. Stat. § 45-21.31,
the proceeds “shall be applied by the person making the sale” to
satisfy certain costs, expenses, and other obligations. N.C. Gen.
Stat. § 45-21.31(a) (1999). During this stage: (1) the proceeds
of the sale are first applied to any “[c]osts and expenses of thesale, including the trustee's commission . . . and a reasonable
auctioneer's fee”; (2) the proceeds are next applied to certain
taxes on the property which are due and unpaid; (3) the proceeds
are next applied to certain special assessments against the
property sold; and (4) the proceeds are next applied to “[t]he
obligation secured by the mortgage, deed of trust or conditional
sale contract” (including any attorney's fees provided for by such
instrument). Id.; see In re Foreclosure of Ferrell Brothers Farms,
118 N.C. App. 458, 460-61, 455 S.E.2d 676, 677-78 (1995).
At the second stage, pursuant to subsection (b) of N.C. Gen.
Stat. § 45-21.31, “[a]ny surplus remaining after the application of
the proceeds of the sale as set out in subsection (a) shall be paid
to the person or persons entitled thereto, if the person who made
the sale knows who is entitled thereto.” N.C. Gen. Stat. § 45-
21.31(b). If the person who made the sale is in doubt as to who is
entitled to the surplus, or if there are adverse claims asserted as
to the surplus, “the surplus shall be paid to the clerk of the
superior court,” which payment discharges the person who made the
sale from liability. N.C. Gen. Stat. § 45-21.31(b) and (c).
Finally, after the sale is completed and all payments are made, the
trustee is required to file a final report and account with the
clerk of the superior court of the county where the sale is held,
and the clerk is required to “audit the account and record it.”
N.C. Gen. Stat. § 45-21.33(b) (1999). In conducting this audit,
the clerk is only authorized to determine whether the entries in
the report reflect the actual receipts and disbursements made by
the trustee. Ferrell Brothers, 118 N.C. App. at 461, 455 S.E.2d at678.
This Court has explained that the application of the proceeds
of the sale, made pursuant to subsection (a) of N.C. Gen. Stat. §
45-21.31, are “within the sole province of the trustee,” and that
the trustee is not required to receive pre-approval from the clerk
of superior court, or the superior court, regarding the application
of the proceeds. Id. Moreover, we have held that, within the
context of a foreclosure proceeding pursuant to Chapter 45, Article
2A, the legislature has not provided any means for a party to
contest payments made by a trustee pursuant to subsection (a), and
that disputes regarding such payments are not issues properly
before the clerk of superior court or the superior court as part of
a foreclosure proceeding. Id. at 460, 455 S.E.2d at 677 (holding
that a junior mortgagee's challenge as to the amount of the
trustee's commission and attorney's fees, made pursuant to
subsection (a) of N.C. Gen. Stat. § 45-21.31, was not properly
before superior court in foreclosure proceeding). By contrast, a
dispute as to who is entitled to the surplus of the proceeds, after
the proceeds have been applied as required by subsection (a) of
N.C. Gen. Stat. § 45-21.31, is an issue that may be heard by the
clerk of superior court or the superior court within the context of
a foreclosure proceeding. See N.C. Gen. Stat. § 45-21.32 (1999)
(any person who claims that they are entitled to some portion of
the surplus may institute a special proceeding before the clerk of
the superior court and, if any answer is filed raising issues of
fact as to the ownership of the surplus, the proceeding istransferred to the superior court for trial).
In the present case, there are two categories of payments in
dispute: (1) the trustee's attorney's fees of $9,619.68, resulting
from time spent on the foreclosure sale by the trustee and the
attorneys in his firm; and (2) the expenses charged by Mr. Price
for the removal of Mr. Webber's personalty from the property, and
for the care and storage of Mr. Webber's horses. Both of these
categories of payments fall within the costs, expenses, and other
obligations listed in subsection (a) of N.C. Gen. Stat. § 45-21.31.
In Merrit v. Edwards Ridge, 323 N.C. 330, 372 S.E.2d 559 (1988),
our Supreme Court described the nature of the costs, expenses, and
other obligations listed in items (1), (2) and (3) of subsection
(a) of N.C. Gen. Stat. § 45-21.31:
Payment of the costs and expenses required by
N.C.G.S. § 45-21.31(a) is not the obligation
of the purchase money debtor whose deed of
trust is being foreclosed. Nor is it,
strictly speaking, the obligation of the buyer
at the foreclosure sale. Instead, these
statutory costs and expenses, including the
trustee's commission, are simply obligations
arising from the foreclosure sale which must
be paid by the trustee before the remainder of
the proceeds may be distributed.
Id. at 336, 372 S.E.2d at 563. Because the payments in dispute
here fall under subsection (a), they are “within the sole province
of the trustee.” Ferrell Brothers, 118 N.C. App. at 461, 455
S.E.2d at 678. Moreover, neither the clerk of superior court nor
the superior court had statutory authority under Chapter 45,
Article 2A, to review the trustee's proposed application of the
proceeds of the foreclosure sale, or to allow, disallow, or modifythe amount of such proposed payments, or to rule on whether the
trustee had breached his fiduciary duties.
We suggest that the proper procedure, as contemplated by
Chapter 45, Article 2A, was for the trustee to have: (1) made all
payments pursuant to subsection (a) of N.C. Gen. Stat. § 45-21.31
as he deemed proper in his discretion; (2) either paid the surplus
to the persons entitled thereto, or paid the surplus to the clerk
if there were any dispute as to who was entitled thereto, pursuant
to N.C. Gen. Stat. § 45-21.31(b); and (3) filed a final report and
account with the clerk pursuant to N.C. Gen. Stat. § 45-21.33. We
note that a party wishing to challenge payments made pursuant to
N.C. Gen. Stat. § 45-21.31(a) may do so in a separate proceeding
against the trustee for a breach of fiduciary duty once such
payments have been made. See Sloop v. London, 27 N.C. App. 516,
219 S.E.2d 502 (1975) (action for wrongful foreclosure alleging, in
part, breach of fiduciary duty by trustee). We also note that,
presumably, a trustee seeking guidance as to the application of the
proceeds of a foreclosure sale may institute a declaratory judgment
action, provided the prerequisites for such an action (including an
actual controversy between the parties) are satisfied. The
judgment of the superior court, and the order of the clerk of
superior court, are vacated.
Vacated.
Judges GREENE and THOMAS concur.
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