On June 1, 2023, the North Carolina Court of Appeals published two opinions involving issues of: (i) lenders’ rights to equitable subrogation, and (ii) substantial performance as a means to support a breach of contract claim under real property purchase and sale agreements. Each case is summarized and discussed in turn below.
I. Midfirst Bank v. Brown[1] - Extinguishment of Subordinate Liens and “Excusable Ignorance” as a means for Equitable Subrogation.
Midfirst Bank involved issues of lien priority fit for a law school exam question. Defendant-appellant Betty Brown purchased a home in Charlotte and in 2004 obtained a loan from First Horizon Home Loan Corporation secured by a deed of trust on her property. In 2010, an unrelated judgment was entered against Ms. Brown and later filed in Mecklenburg County Superior Court. Later, in 2016 Ms. Brown refinanced the 2004 First Horizon loan through Nationstar Mortgage (now Midfirst Bank), who thereafter recorded a deed of trust on the same property. In 2019, the 2010 judgment was levied against Ms. Brown’s property and the property was foreclosed on, but sold by Sheriff’s deed to Ms. Brown and her daughter after they placed an upset bid for the property. Following the sale, Midfirst Bank filed a complaint: (i) seeking to quiet title to the property arguing that its 2016 deed of trust still encumbered the property notwithstanding the prior foreclosure proceedings; and (ii) alternatively arguing that it was subrogated to the rights and priorities of the 2004 First Horizon deed of trust following its satisfaction.
The trial court held in favor of Midfirst, but on appeal the Court of Appeals reversed and remanded for summary judgment in favor of Ms. Brown and her daughter. Citing NCGS § 1-339.68(b)[2], the Court of Appeals held simply that because the 2016 Midfirst deed of trust became effective as a lien on the property after the 2010 judgment under which the 2019 execution sale took place, the 2016 Midfirst deed of trust was extinguished by the sale. Midfirst argued, unsuccessfully, that the Sheriff’s deed for the execution sale, which stated that the deed remained “subject to all liens and any encumbrances” against the subject property, dictates the terms of the conveyance and controls what liens remain attached to the property after it is sold. The Court of Appeals held simply that, regardless of the plain language of a deed or deed restriction, the terms will not stand if they violate or contravene a provision of the NC General Statutes.
The Court of Appeals also found unconvincing Midfirst’s equitable subrogation argument. In North Carolina, equitable subrogation may apply to place a lender whose security has been extinguished in the position of a prior creditor where the lender provides money on the condition that: (1) the money be used to extinguish debt owned by the seller of the property, so that (2) the lender gains a first-position lien over the property. However, equitable subrogation is not an absolute right, and the party asserting it must be “excusably ignorant” of intervening liens. Midfirst claimed that it was excusably ignorant of the 2010 judgment for the sole reason that Ms. Brown failed to disclose it in her 2016 loan documents. The Court of Appeals disagreed, holding that because the 2010 judgment was publicly recorded, Midfirst could not claim excusable ignorance of its existence to support equitable subrogation.
Interestingly, Midfirst failed to bring a claim for fraud against Ms. Brown for her failure to disclose the 2010 judgment, a fact that the Court of Appeals mentions critically in the closing paragraphs of its opinion. Midfirst Bank serves as a reminder of the need for a full and thorough title examination in connection with North Carolina real property transactions, and a North Carolina court’s likely unwillingness to forgive errors and omissions in those searches.
II. Ricky Spoon Builders, Inc. v. EmGee LLC[3] - “Time is of the Essence” Provisions and their Impact on the Doctrine of Substantial Performance.
North Carolina transactional attorneys will want to take heed of the holding in Ricky Spoon and its emphasis on the importance and impact of common boilerplate, but often overlooked, “time is of the essence” provisions in purchase and sale agreements. Ricky Spoon involved parties to a real property option contract, which generally gave each party the option to make a one-time cash offer to purchase property in Chatham County. Upon receipt of a party’s initial offer to purchase the property, the receiving party then had the right to make a response offer for the property pursuant to the terms of the contract. At the time the initial offer under the contract is made, the initial offering party was required to make a $100,000.00 non-refundable earnest money deposit with Investors Title Insurance Company. The contract further stipulated that it expired at 5:00 p.m. EST on November 3, 2020, and that “time is of the essence” with regard to the contract.
On November 2, 2020, the day before the contract expired, Ricky Spoon made the initial offer to EmGee, and wired the $100,000.00 earnest money deposit to Ricky Spoon’s attorney’s trust account. At 3:52 p.m. on November 3, 2020, due to complications brought on by the COVID-19 pandemic, Ricky Spoon’s attorney was unable to wire the earnest money deposit to Investors Title. Instead, shortly after 4:00 p.m. the attorney placed a check for the earnest money deposit in the mail addressed to Investors Title, which was post-marked November 5, 2020, and which Investors Title did not receive until November 16, 2020. EmGee considered the contract terminated by expiration and when it refused to close on the sale of the property, Ricky Spoon filed suit for breach of contract.
The trial court granted summary judgment in favor of EmGee, and the Court of Appeals affirmed. Ricky Spoon argued on appeal that summary judgment was granted in error because it had fully or substantially complied with the terms of the contract when it deposited the $100,000.00 earnest money deposit in the mail to Investors Title prior to 5:00 p.m. EST on November 3, 2020. On the full compliance argument, the Court of Appeals disagreed, finding that the contract unambiguously provided that the earnest money deposit was required to be physically deposited with Investors Title before 5:00 p.m. EST on November 3, 2020, which did not happen.
The Court of Appeals also disagreed on the substantial compliance argument. North Carolina recognizes the equitable doctrine of substantial performance, which allows a party to recover on a contract although it has not literally complied with its provisions. However, in North Carolina a “time is of the essence” clause makes completion dates and times a material term of a contract, causing a material breach if performance is late. Due to the “time is of the essence” provision in the contract, the Court of Appeals held that the doctrine of substantial performance did not apply in this case, acknowledging the traditional view that the doctrine of substantial performance does not apply where the parties to a contract have made it clear that only strict or complete performance will be satisfactory. The Court of Appeals did not stop there however, stating further that even if it were to consider tempering the foregoing traditional rule, Ricky Spoon did not substantially perform under the contract at all when it deposited the earnest money deposit with Investors Title on November 16, 2020, nearly two weeks after the contract’s expiration date.
Transactional attorneys in North Carolina should always keep the doctrine of substantial performance as an arrow in their quiver if a deal goes south. However, they should also be wary of the fact that substantial performance is unlikely to pierce the shield that a “time is of the essence” provision casts.
[1] 286 N.C. App. 664.
[2] NCGS § 1-339.68(b) provides that “[a]ny real property sold under execution remains subject to all liens which became effective prior to the lien of judgment pursuant to which the sale is held, in the same manner and to the same extent as if no such sale had been held.” (emphasis added).
[3] 286 N.C. App. 684.
