Appeal by petitioners from judgment and order entered 5 June
2006 by Judge Clifton W. Everett, Jr. in Wilson County Superior
Court. Heard in the Court of Appeals 25 April 2007.
Harvell and Collins, P.A., by Wesley A. Collins, for
petitioners-appellants.
Hinson & Rhyne, P.A., by John G. Rhyne and Walter L. Hinson,
for respondents-appellees.
GEER, Judge.
Petitioners Anne P. Worthington and Dean W. Worthington appeal
from a judgment of the superior court dismissing their foreclosure
action. Petitioners had attempted to exercise a power of sale
contained in a deed of trust executed by respondents Charles D.
Woodard and Phyllis G. Woodard in favor of petitioners. On appeal,
petitioners primarily argue that the trial court erred by
concluding that respondents had not defaulted on a note secured by
the deed of trust. Because the trial court's findings of fact are
supported by competent evidence and those findings, in turn,
support the trial court's conclusion, we affirm.
Facts
Sometime before August 1987, W. Roy Poole agreed to build a
building for respondents. In exchange, respondents executed a
promissory note in August 1987 in the amount of $460,000.00. The
note was payable to Poole's daughter, petitioner Anne P.
Worthington, and grandson, petitioner Dean W. Worthington. The
note was left with Poole at the law offices of his attorney, Thomas
B. Griffin. Petitioners assert that they were unaware of the
note's existence at the time of its execution.
Under the terms of the note, respondents were required to
repay the principal, along with 12% annual interest, in 180 monthly
installments of $5,525.00. The note was secured by a deed of trust
on a parcel of real property in Wilson County owned by respondents.
The deed of trust included a power of sale in the event of a
default and, as with the note, the parties to the deed of trust
were respondents and petitioners. Griffin was named as trustee.
In accordance with Poole's instructions, respondents made
payments on the note from March 1988 until September 1998 by
delivering personal checks, payable to Poole, to Poole's office
where they were accepted and deposited. During this time, annual
IRS Form 1096s were prepared for each petitioner reflecting receipt
of interest from respondents' payments, and petitioners' tax
returns also reported the interest as income. Petitioners
testified they signed these returns without examining them.
Petitioners assert they first became aware of the note in
1998, during the course of a family "buyout," in which petitionerssold stock they owned in various family corporations to Poole and
his son, Anne Worthington's brother, in exchange for various
assets. A release signed by petitioners as part of the buyout
indicated that Poole and his son were conveying to petitioners
"[o]ne account receivable . . . secured by note and deed of trust
from Charles D. Woodard in the amount of $139,454.64." The actual
note and deed of trust, along with other materials, were delivered
to Ms. Worthington in a large box following the buyout.
Petitioners did not, however, examine either the note or deed of
trust at that time.
In October 1998, Poole instructed respondents to make future
monthly payments on the note by sending two checks to Poole's
office _ one payable to Anne Worthington and one payable to Dean
Worthington, with each for half of the monthly amount. Later,
respondents were told to send the checks directly to petitioners.
In March 2003, respondents made the 180th payment on the note
and, accordingly, the checks to petitioners ceased. At that time,
Anne Worthington took the box of documents she had received
following the buyout to the office of her attorney, Wesley A.
Collins. In the box, Collins discovered the original note, naming
petitioners as the payees. In September 2005, petitioners removed
Poole's attorney as trustee on the deed of trust and appointed a
substitute trustee, attorney James R. Cummings.
Petitioners sent respondents a demand letter dated 12 October
2005, contending that the first payment on the note was actually
made when respondents began paying petitioners in October 1998rather than when respondents first paid Poole. The letter claimed
that respondents were, therefore, "in default for failure to make
proper payments pursuant to the terms of the Promissory Note."
Petitioners stated that they were exercising their "rights of
acceleration" under the note and that the payoff of principal and
interest totaled $3,307,158.20 plus an average accrual of daily
interest in the amount of $1,082.00.
On 3 November 2005, the substitute trustee filed a Notice of
Hearing Prior to Foreclosure of Deed of Trust, notifying the
Woodards that a foreclosure sale of the real property secured by
the deed of trust was scheduled for 10 January 2006 and that they
had a right to appear at a hearing on the foreclosure on 14
December 2005. On 16 December 2005, the Worthingtons also each
filed a petition before the Clerk of Wilson County Superior Court
seeking foreclosure. The clerk entered an order the same day,
concluding that the "evidence of default did not meet the burden"
and dismissing the petitions. Petitioners appealed to the superior
court from the clerk's order.
The matter was heard de novo by the superior court on 27 March
2006. After conducting an evidentiary hearing, the trial court
entered an order on 5 June 2006, finding that "[a]ll payments
hav[e] been made pursuant to the . . . Promissory Note" and that
"there now exists no amount payable under its terms." The trial
court concluded that, as a result, there was neither a valid debt
nor a default under the terms of the note and dismissedpetitioners' foreclosure proceeding. Petitioners have now appealed
to this Court.
Discussion
"A deed of trust gives the note holder a contractual remedy
for default, namely a right to foreclose under the instrument."
In
re Foreclosure of Azalea Garden Bd. & Care, Inc., 140 N.C. App. 45,
51, 535 S.E.2d 388, 393 (2000). In a foreclosure action, the clerk
of superior court holds a hearing to determine four issues: (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. N.C. Gen.
Stat. § 45-21.16(d) (2005). On appeal, the superior court conducts
a de novo hearing addressing the same four issues.
In re
Foreclosure of Goforth Props., Inc., 334 N.C. 369, 374, 432 S.E.2d
855, 858 (1993).
"The Clerk of Superior Court is limited to making the four
findings of fact specified in [N.C. Gen. Stat. § 45-21.16(d)], and
it follows that the Superior Court Judge is similarly limited in
the hearing
de novo."
In re Watts, 38 N.C. App. 90, 94, 247 S.E.2d
427, 429 (1978). As the party seeking the foreclosure, petitioners
bore the burden of proof on each of the four factual issues.
In re
Foreclosure of Brown, 156 N.C. App. 477, 489, 577 S.E.2d 398, 406
(2003). On appeal of the superior court's judgment, this Court
reviews only "whether competent evidence exists to support the
trial court's findings of fact and whether the conclusions reachedwere proper in light of the findings."
Azalea Garden Bd. & Care,
Inc., 140 N.C. App. at 50, 535 S.E.2d at 392.
As reflected in both the clerk's order dismissing the
petitions and the superior court order on appeal, the key issue in
this case is whether petitioners met their burden of establishing
that respondents were in default on the note. We find ample
evidence to support the superior court's determination that
petitioners did not do so.
"[A]n instrument is paid to the extent payment is made (i) by
or on behalf of a party obliged to pay the instrument, and (ii) to
a person entitled to enforce the instrument." N.C. Gen. Stat. §
25-3-602(a) (2005). To the extent of such a payment, there is no
default, and the obligation of the party obliged to pay the
instrument is discharged.
Id.
In this case, the trial court found that all payments required
under the note had been made, that no amount remained due, and that
there was no default under the note. Petitioners do not dispute
that respondents made 180 payments. They contend, however, that
respondents made most of the payments to the wrong person and,
therefore, respondents remain liable to petitioners. We disagree.
The trial court's findings reflect a determination that
petitioners failed to meet their burden of establishing the debt
had not been paid and, therefore, failed to show the existence of
a default.
See Brown, 156 N.C. App. at 489, 577 S.E.2d at 406
(noting foreclosing party bears burden of establishing all elements
of right to foreclose, including default).
See also N.C. Gen.Stat. § 25-3-602(a) ("To the extent of the payment, the obligation
of the party obliged to pay the instrument is discharged . . . .").
The record contains sufficient evidence to support such a finding.
As the trial court found and the evidence established, the
interest paid pursuant to the note was reported on petitioners' tax
returns as well as other tax forms forwarded to the Internal
Revenue Service. Ms. Worthington testified that she trusted the
certified public accountant who prepared these tax returns and that
he had continued to prepare her returns after the family buyout.
Further, three of the Woodards' checks were endorsed on the reverse
as for deposit to the accounts of Anne and/or Dean Worthington.
Petitioner Dean Worthington also acknowledged that his
grandfather kept a ledger card system regarding the accounts of
each family member and shareholder in the family business, which
was composed of multiple corporations. The controller for the
family business, a certified public accountant, explained that
"these ledger cards [were] a running balance for the shareholders
or the family members[.]"
(See footnote 1)
According to the controller, the ledger
cards recorded credits to each family member's account from
payments received by the family business on that family member's
behalf, as well as debits resulting from payments made for the
benefit of the family member. In reviewing the Worthingtons'
ledger cards, the controller identified deposits that came in fromvarious sources, as well as debits or charges related to paying the
Worthingtons' debts, such as pharmacy and utility bills and various
taxes. The Worthingtons, in their own testimony, testified that
tuition for Baylor and Harvard Universities and a beach house were
paid for on their behalf by the family business.
The controller specifically testified that on the ledger card
for Anne Worthington, there was an initial entry in the amount of
$230,000.00 _ half the amount due under the Woodards' note _
constituting an account receivable owed to Anne Worthington from
the Woodards. As of 12 May 1998, the ledger card reflected a
balance due of $139,454.64. He confirmed that there was a similar
ledger card for Dean Worthington. These ledger cards also
reflected credits for amounts received from the Woodards over time.
Finally, when Dean Worthington was asked by his attorney on
direct examination whether he received the benefit of the Woodard
payments, he responded: "I just would have no way of knowing the
answer to that." He could only say that the payments had not
personally been delivered to him until after the family buyout.
Anne Worthington testified that she knew "nothing" about her money
until 1998 when the family buyout occurred.
In short, the record contains evidence that would permit the
trial court to find that petitioners failed to prove that they did
not in fact receive the funds from respondents' payments.
Petitioners, however, point to this Court's opinion in
Summerlin v.
Nat'l Serv. Indus., Inc., 72 N.C. App. 476, 325 S.E.2d 12 (1985),
and argue that, under
Summerlin, even if the Worthingtons receivedthe benefit from all 180 payments, the debt was not discharged
because the payments were not made directly to the Worthingtons
until after the family buyout. We do not agree with petitioners'
reading of
Summerlin.
In
Summerlin, the plaintiff terminated his employment, left
his wife, and moved to another state.
Id. at 477, 325 S.E.2d at
13. When his wife received a letter from the employer regarding
the plaintiff's options in connection with a corporate pension plan
and she could not locate her husband, she signed the form for him,
electing a cash refund.
Id. Once the refund check arrived, the
wife endorsed the check with her husband's name, deposited it in
their joint checking account, and used the proceeds to pay some of
her husband's and the couple's liabilities.
Id. The plaintiff
subsequently sued his employer to recover the pension funds, but
the trial court granted the employer a directed verdict.
Id.
On appeal, this Court stated that "[t]he key issue becomes
whether payment or satisfaction has been made to the 'holder' in
the case
sub judice, thus discharging the defendant's liability on
the instrument and the underlying obligation."
Id. at 478, 325
S.E.2d at 13.
(See footnote 2)
The Court noted that "payment or satisfaction to an
authorized agent of the 'holder' is sufficient to discharge thedefendant's liability on the instrument and on the underlying
obligation."
Id. at 479, 325 S.E.2d at 14. The Court added:
"Similarly, if the plaintiff ratified his wife's unauthorized
endorsement or if he is precluded from denying it, defendant's
liability on the check and on the underlying obligation is
discharged."
Id.
Contrary to petitioners' contention in this case, the Court
did not hold that the
Summerlin plaintiff was, in fact, entitled to
recover the pension funds because they had not been paid to a
holder. Instead, the Court concluded that the evidence created a
factual dispute whether the plaintiff's wife had an agency
relationship with her husband, making summary judgment or a
directed verdict inappropriate for either party.
Id. at 480, 325
S.E.2d at 14. The case was, therefore, remanded for trial.
Id.,
325 S.E.2d at 15.
Petitioners primarily cite
Summerlin as holding that receipt
of the benefit of any payments is insufficient to constitute
payment sufficient to discharge a debt. Although the Court in
Summerlin mentioned, in its statement of facts, that some of the
plaintiff's liabilities had been paid by the wife using the
proceeds, the opinion does not actually include any holding along
the lines argued by petitioners. Under petitioners' analysis, if
a debtor paid amounts due to a third party, who in turn delivered
the proceeds in full to the person entitled to payment, the debtor
would still be liable on the debt. Nothing in
Summerlin requires
such a draconian result. Applying the actual holding of
Summerlin to the evidence in
this case, it is undisputed that payments, prior to the family
buyout, were all physically delivered to Roy Poole. The record
contains ample evidence that, prior to the family buyout, Roy Poole
was acting as the Worthingtons' agent for purposes of their
financial affairs. Under
Summerlin, payment to the Worthingtons'
agent was sufficient to discharge the debt.
See also 11 Am. Jur.
2d
Bills and Notes § 402 (1997) ("[T]he payor of a note exposes
himself or herself to double liability if he or she makes payment
to someone other than the holder of the instrument,
unless the
other person to whom payment is made is an agent of the owner of
the note." (emphasis added)).
Petitioners urge that the trial court's order cannot be upheld
on agency principles because the trial court made no finding
regarding agency. Although the trial court did not specifically
find Poole's agency, the court made numerous findings pertaining to
his acceptance of payments on petitioners' behalf, his general
control over petitioners' finances, his decision to create the note
on petitioners' behalf, his oversight of petitioners' tax returns,
and his inclusion of interest income from the note on those
returns. Indeed, the court specifically found that all payments
made to Poole had been made "pursuant to" the terms of the note _
a finding that makes no sense in the absence of a finding of
agency. "[I]f a judgment is subject to two interpretations, the
court will adopt that one which makes it harmonize with the
applicable law."
White v. Graham, 72 N.C. App. 436, 441, 325S.E.2d 497, 501 (1985). We believe that the findings sufficiently
indicate the trial court incorporated agency principles within its
decision.
There are two essential ingredients in the principal-agent
relationship: (1) Authority, either express or implied, of the
agent to act for the principal, and (2) the principal's right to
control.
Phelps-Dickson Builders, L.L.C. v. Amerimann Partners,
172 N.C. App. 427, 435, 617 S.E.2d 664, 669 (2005). "In the
absence of an agreement to the contrary, the authority of an agent
to collect or receive payment of a debt owing the principal will be
implied if the collection or receipt of the payment is incidental
to the agency transaction, usually accompanies it, or is a
reasonably necessary means for effectuating the main authority
conferred." 3 Am. Jur. 2d
Agency § 133 (2002).
Here, the record is replete with evidence indicating that
while Poole was in possession of the note, he functioned as the
Worthingtons' agent for purposes of their financial affairs. Both
Anne and Dean Worthington acknowledged that they ceded all
responsibility for their finances to Poole. As Ms. Worthington
testified, "My father was in charge." While the Worthingtons both
suggested they had no choice, since they would otherwise have to
forego the money the relationship afforded them, that is in fact a
choice. Thus, the trial court could reasonably conclude that the
Worthingtons implicitly agreed to allow Poole to act on their
behalf in financial matters and find not credible their claim that
they never granted authority to Poole. Petitioners also contend that no agency relationship existed
because they had no control over Poole generally and, with respect
to the Woodard note, could not control him because they did not
know about the note. This argument, however, focuses on actual
control. As our Supreme Court has ruled, the question is whether
the principal has the "right to control" the agent.
Jones v. Lake
Hickory R.V. Resort, Inc., 162 N.C. App. 618, 631, 592 S.E.2d 284,
293 (Bryant, J., dissenting),
rev'd per curiam for reasons in the
dissent, 359 N.C. 181, 606 S.E.2d 119 (2004). Petitioners do not
dispute that they had the right to control their own finances. The
fact that they chose not to do so does not vitiate the agency
relationship.
Under
Summerlin, if Poole was the Worthingtons' agent, then
the Woodards were discharged from liability on the note by making
payments to Poole. 72 N.C. App. at 479, 325 S.E.2d at 14 (holding
that "payment or satisfaction to an authorized agent of the
'holder' is sufficient to discharge the defendant's liability on
the instrument and on the underlying obligation"). We conclude
that the record contains sufficient competent evidence to support
the trial court's finding that when the Woodards made their
payments under the note, they were entitled, prior to the buyout,
to pay Poole.
Compare Phelps-Dickson Builders, L.L.C., 172 N.C.
App. at 435-36, 617 S.E.2d at 669 (concluding sufficient evidence
of agency relationship existed when purported agent exercised
"sweeping powers," including signing various documents and
agreements, with the alleged principal's "knowledge and consent"). In short, given the evidence in the record indicating Poole's
authority to accept payments on petitioners' behalf during his
possession of the note and the additional failure of petitioners to
be able to prove that they did not receive the benefit of
respondents' payments, we find the trial court's conclusion that
petitioners failed to meet their burden of establishing a default
fully supported by the evidence. We, therefore, affirm. Because
petitioners necessarily cannot recover without establishing
respondents' default, N.C. Gen. Stat. § 45-21.16(d), we need not
consider petitioners' additional arguments.
Affirmed.
Judges WYNN and ELMORE concur.
Report per Rule 30(e).
Footnote: 1