In re: Rawls , 243 N.C. App. 316 ( 2015 )

IN THE COURT OF APPEALS OF NORTH CAROLINA
No. COA15-248
Filed: 6 October 2015
Caldwell County, No. 13 SP 164
IN THE MATTER OF THE FORECLOSURE OF A DEED OF TRUST EXECUTED
BY CAROL A. RAWLS AND DEWEY GEORGE RAWLS DATED JANUARY 24, 2005
AND RECORDED IN BOOK 1538 AT PAGE 1243 IN THE CALDWELL COUNTY
PUBLIC REGISTRY, NORTH CAROLINA
Appeal by Respondent from order entered 12 June 2014 by Judge C. Thomas
Edwards in Caldwell County Superior Court. Heard in the Court of Appeals 26
August 2015.
Shapiro & Ingle, LLP, by Jason K. Purser, for petitioner-appellee.
Lindley Law, PLLC, by Trey Lindley, and Clontz & Clontz, PLLC, by Ralph C.
Clontz III, for respondent-appellant.
ZACHARY, Judge.
Turnip Investments, LLC (respondent) appeals from an order authorizing the
substitute trustee to proceed with a foreclosure sale to recover money owed on a debt
secured by a note and deed of trust on property located in Hickory, North Carolina
(the property). On appeal, respondent argues that the trial court erred by allowing
the foreclosure to proceed, on the grounds that E*Trade (petitioner) failed to prove
that it was the holder of the note evidencing the debt, and that respondent had not
personally defaulted on the loan. We conclude that the trial court did not err by
IN RE: RAWLS
Opinion of the Court
concluding that petitioner was the holder of the note, and that respondent failed to
preserve the issue of default for appellate review.
I. Factual and Procedural Background
On 24 January 2005 Carol Rawls executed a Home Equity Credit Line
Agreement in favor of Capital One F.S.B. (Capital One) in exchange for an $85,500.00
credit line loan. On the same date, Ms. Rawls and her husband, Dewey Rawls,
executed a Deed of Trust for the property to secure the loan. The note and deed of
trust were later indorsed in blank and possession was transferred to petitioner. The
last payment towards the loan was made on 25 June 2012. On 12 April 2013 the
substitute trustees, Grady I. Ingle or Elizabeth B. Ells, filed a notice of a hearing on
foreclosure of the deed of trust. At some point prior to the filing of the foreclosure
notice, respondent had purchased the property at an execution sale, subject to the
deed of trust; however, the record does not indicate the date of respondent’s purchase.
The notice, which was directed both to Dewey and Carol Rawls and to respondent,
alleged that respondent was the present owner of the property and that the loan was
in default. On 22 July 2013 the Ford Firm, PLLC, was appointed substitute trustee.
On 30 July 2013 the Assistant Clerk of Superior Court of Caldwell County entered
an order permitting the foreclosure to proceed.
Respondent appealed the order to the Superior Court, where a hearing was
conducted on 2 June 2014. At the hearing, petitioner “tender[ed the] court file and
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Opinion of the Court
the documents therein” to the trial court. In addition, petitioner proffered the
“original promissory note indorsed in blank” for the trial court to review and compare
to the copy in the court file. Petitioner also informed respondent and the trial court
that it had been unable to secure service on the Rawls, who are not parties to this
appeal. On 12 June 2014 the trial court entered an order allowing foreclosure.
Respondent appeals.
II. Standard of Review
Respondent appeals from the trial court’s order entered following a bench trial
on petitioner’s right to proceed with foreclosure. “When an appellate court reviews
the decision of a trial court sitting without a jury, ‘findings of fact have the force and
effect of a verdict by a jury and are conclusive on appeal if there is evidence to support
them, even though the evidence might sustain a finding to the contrary.’ ” In re
Foreclosure of Bass, 366 N.C. 464, 467, 738 S.E.2d 173, 175 (2013) (quoting Knutton
v. Cofield, 273 N.C. 355, 359, 160 S.E.2d 29, 33 (1968)). “ ‘Conclusions of law drawn
by the trial court from its findings of fact are reviewable de novo on appeal.’ ” Id.(quoting Carolina Power & Light Co. v. City of Asheville, 358 N.C. 512, 517, 597
S.E.2d 717, 721 (2004)). “When this Court determines that findings of fact and
conclusions of law have been mislabeled by the trial court, we may reclassify them,
where necessary, before applying our standard of review.” In re Simpson, 211 N.C.
App. 483, 487-88, 711 S.E.2d 165, 169 (2011) (citing In re Helms, 127 N.C. App. 505,
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510, 491 S.E.2d 672, 675 (1997), and N.C. State Bar v. Key, 189 N.C. App. 80, 88, 658
S.E.2d 493, 499 (2008)).
III. Analysis
On appeal, respondent challenges the trial court’s determination that
petitioner was entitled to proceed with foreclosure. Respondent argues that the trial
court erred by finding that petitioner was the holder of a valid debt and that it was
error to find the existence of default on the debt. The elements of a valid foreclosure
proceeding are well established:
[C]ertain elements must be established by the clerk of
superior court before a mortgagee or trustee may proceed
with a foreclosure by power of sale, including findings of a
“(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 to those entitled to such under
subsection (b)[.]”. . . When a foreclosure action is appealed
to the superior court, the trial court is limited to a de novo
review of those same elements. N.C. Gen. Stat. § 45-
21.16(d) (2011).
In re Manning, __ N.C. App. __, __, 747 S.E.2d 286, 290 (2013) (quoting N.C. Gen.
Stat. § 45-21.16(d)).
A. Petitioner as Holder of Valid Debt
Respondent argues first that in its order the trial court made no specific
findings of facts as to who had possession of the promissory note, instead grouping
the paragraphs of the court’s order into one “findings of fact and conclusions of law.”
It is clear that this Court may categorize the findings of fact and conclusions of law.
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Id. Respondent also asserts that there was no competent evidence that at the time
of the hearing petitioner was the holder of the promissory note securing the debt.
Specifically, respondent contends that petitioner’s production of the original note
indorsed in blank did not establish that petitioner possessed the note, and that
affidavits submitted by petitioner contained hearsay which should not have been
considered by the trial court. We find petitioner’s production of the original note
indorsed in blank to be dispositive.
Under North Carolina law, “[i]n order to find that there is sufficient evidence
that the party seeking to foreclose is the holder of a valid debt, we must find (1)
competent evidence of a valid debt, and (2) that the party seeking to foreclose is the
current holder of the Note.” Manning, __ N.C. App. at __, 747 S.E.2d at 291 (citing In
re Foreclosure of Adams, 204 N.C. App. 318, 321, 693 S.E.2d 705, 709 (2010)). “This
Court has determined that the definition of ‘holder’ in North Carolina’s adoption of
the Uniform Commercial Code (‘UCC’) is applicable to the term as it is used in
N.C.G.S. § 45-21.16 for foreclosures under powers of sale.” Adams, 204 N.C. App. at
322, 693 S.E.2d at 709 (2010) (citing Connolly v. Potts, 63 N.C. App. 547, 551, 306
S.E.2d 123, 125 (1983)). We next review the applicable definitions under the UCC.
A “promissory note is a ‘negotiable instrument’ under N.C. Gen. Stat. [§] 25-3-
104(a).” Franklin Credit Recovery Fund v. Huber, 127 N.C. App. 187, 189, 487 S.E.2d
825, 826 (1997). N.C. Gen. Stat. § 25-1-201(b)(21) defines a “holder” in relevant part
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as the “person in possession of a negotiable instrument that is payable either to
bearer or to an identified person that is the person in possession” and thereafter at
N.C. Gen. Stat. § 25-1-201(b)(27) defines “person” to include “an individual,
corporation, business trust, estate, trust, partnership, limited liability company,
association, joint venture . . . public corporation, or any other legal or commercial
entity[.] “Bearer” is defined by the same statute in part as “a person in possession of
a negotiable instrument, negotiable tangible document of title, or certificated security
that is payable to bearer or indorsed in blank.” An “indorsement is ‘a signature . . .
that alone or accompanied by other words is made on an instrument for the purpose
of . . . negotiating the instrument.’ ” Bass, 366 N.C. at 468, 738 S.E.2d at 176 (quoting
N.C. Gen. Stat. § 25-3-204(a)).
The Uniform Commercial Code differentiates between two types of
indorsements: special and blank. If an indorsement is “made by the holder of an
instrument, whether payable to an identified person or payable to bearer, and the
indorsement identifies a person to whom it makes the instrument payable, it is a
‘special indorsement.’ ” N.C. Gen. Stat. § 25-3-205(a). “If an indorsement is made by
the holder of an instrument and it is not a special indorsement, it is a ‘blank
indorsement’. When indorsed in blank, an instrument becomes payable to bearer and
may be negotiated by transfer of possession alone until specially indorsed.” N.C. Gen.
Stat. § 25-3-205(b). The distinction between a “special indorsement” and an
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indorsement “in blank” may be significant in determining whether a petitioner has
shown possession of the note. As stated in the Official Comments to N.C. Gen. Stat.
§ 25-3-205:
If the indorsement is made by a holder and is not a special
indorsement, it is a blank indorsement. For example, the
holder of an instrument, intending to make a special
indorsement, writes the words ‘Pay to the order of’ without
completing the indorsement by writing the name of the
indorsee. The holder’s signature appears under the quoted
words. The indorsement is not a special indorsement
because it does not identify a person to whom it makes the
instrument payable. Since it is not a special indorsement it
is a blank indorsement and the instrument is payable to
bearer. The result is analogous to that of a check in which
the name of the payee is left blank by the drawer.
Thus, as noted by the Fourth Circuit, “[n]egotiable instruments like mortgage notes
that are endorsed in blank may be freely transferred. And once transferred, the old
adage about possession being nine-tenths of the law is, if anything, an
understatement. Whoever possesses an instrument endorsed in blank has full power
to enforce it.” Horvath v. Bank of New York, N.A., 641 F.3d 617, 621 (4th Cir. 2011).
Applying the above definitions, this Court concludes that the “holder” of a
promissory note may be a bank or other lending institution that is in possession of a
note that has been indorsed in blank:
Under the Code, the party in possession of a negotiable
instrument indorsed in blank is presumptively the holder.
N.C. Gen. Stat. § 25-1-201(b)(21) (2013); N.C. Gen. Stat. §
25-3-109 (2013). See also, In re Manning, __ N.C. App. __,
__, 747 S.E.2d 286, 291-92 (2013) (presentation of the
original note to the court, indorsed in blank, “serves as
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competent evidence to support the trial court’s finding that
[the party] was the present holder.”).
In re Dispute over the Sum of $375,757.47, __ N.C. App. __, __, 771 S.E.2d 800, 806
(2015). Our conclusion in this regard finds support in several unpublished opinions
of this Court, in addition to opinions from federal bankruptcy court which, although
not binding on this Court, we find persuasive. See, e.g., In re Gibbs, 765 S.E.2d 122,
2014 N.C. App. LEXIS 948 (unpublished):
In a recent case addressing a similar issue, this Court
stated that, “[w]here petitioner, at a foreclosure hearing
before the trial court, produced the original mortgage loan
note reflecting a blank indorsement and an affidavit
stating that the lienholder was in possession of the Note,
such was sufficient to establish the lienholder as the holder
of the Note.” Although we are not bound by our prior
unpublished decisions, we believe that Cornish sheds
additional light on our decision that the record contains
sufficient evidence to establish that Petitioner held
Respondents’ note.
Gibbs, 765 S.E.2d at *17 n.4 (quoting In re Cornish, 757 S.E.2d 526 at *1, 2014 N.C.
App. LEXIS 216 (unpublished), and citing United Services Automobile Assn. v.
Simpson, 126 N.C. App. 393, 396, 485 S.E.2d 337, 339 (1997)). See also, e.g., In re
Hernandez, 2014 Bankr. LEXIS 5146 (Bankr. E.D.N.C. Dec. 24, 2014) (“At the hearing
. . . counsel for [petitioner] presented the original Note with a blank endorsement.
While [petitioner’s counsel] was in actual possession of the Note, he was acting as
attorney, agent and proxy for [petitioner] and it is clear from the court’s examination
of the Note that it was the original document clearly in the possession of
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[petitioner].”), and In re Robinson, No. 07-02146-8-JRL, 2011 Bankr. LEXIS 4504(Bankr. E.D.N.C. Nov. 22, 2011) (“At the hearing, [petitioner] entered the original
promissory note with the blank indorsement into evidence. Thus [petitioner] is clearly
the holder of the note because it is in possession of the original note indorsed in
blank.”).
Based on the plain language of N.C. Gen. Stat. § 25-3-205(b) (“When indorsed
in blank, an instrument becomes payable to bearer and may be negotiated by transfer
of possession alone until specially indorsed.”), and the reasoning of cases such as
those cited above, we hold that a petitioner’s production of an original note indorsed
in blank establishes that the petitioner is the holder of the note. In this case it is
undisputed that petitioner produced the original note indorsed in blank, and we hold
that this was sufficient to support the trial court’s conclusion that petitioner was the
holder of the note.
Respondent concedes on appeal that petitioner produced the original note at
the hearing, but contends that this was insufficient to establish that petitioner was
the holder of the note. Respondent’s position is based upon a quote from Simpson, in
which we stated that “[p]roduction of an original note at trial does not, in itself,
establish that the note was transferred to the party presenting the note with the
purpose of giving that party the right to enforce the instrument[.]” Simpson, 211 N.C.
App. at 491, 711 S.E.2d at 171. Simpson, however, which did not hold that production
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of an original note could never be adequate to establish a petitioner’s right to enforce
a note, is factually distinguishable from the instant case. Simpson did not involve a
note indorsed in blank, but instead concerned a note that had been indorsed to a
specific entity which was “not the party asserting a security interest in Respondent’s
property.” Id. at 493, 711 S.E.2d at 172. Significantly, Simpson specified that it was
“[b]ecause the indorsement does not identify Petitioner and is not indorsed in blank
or to bearer, [that] it cannot be competent evidence that Petitioner is the holder of
the Note.” Id. at 493, 711 S.E.2d at 173 (emphasis added).
Given that we have concluded that petitioner’s production of the original note
indorsed in blank was sufficient to allow the trial court to conclude that petitioner
was the holder of the note, we find it unnecessary to reach respondent’s arguments
concerning the admissibility of the affidavits proffered at the hearing. Respondent
also argues that the trial court erred by holding that petitioner was the holder of the
note without making a specific finding that petitioner was in physical possession of
the note. In this case, there was no dispute that petitioner was in possession of the
note. Moreover, we have held that:
“[W]hen a court fails to make appropriate findings or
conclusions, this Court is not required to remand the
matter if the facts are not in dispute and only one inference
can be drawn from them.” There is no dispute that
petitioner had physical possession of the note at the
hearing . . . Therefore, the only inference that can be drawn
from the evidence is that petitioner . . . was in physical
possession of the note at the time of the hearing.
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In re Foreclosure of Yopp, 217 N.C. App. 488, 499, 720 S.E.2d 769, 775 (2011) (quoting
Green Tree Financial Servicing Corp. v. Young, 133 N.C. App. 339, 341, 515 S.E.2d
223, 224 (1999)). We conclude that respondent’s argument lacks merit.
B. Default
In its second argument, respondent asserts that because it was not the original
borrower, it could not personally be in default under the terms of the loan.
Respondent does not dispute, however, that it purchased the property subject to the
note and deed of trust. Moreover, respondent did not raise any argument challenging
the issue of default at the hearing before the trial court. Rule 10(a)(1) of the North
Carolina Rules of Appellate Procedure states that in order “to preserve an issue for
appellate review, a party must have presented to the trial court a timely request,
objection, or motion, stating the specific grounds for the ruling the party desired the
court to make” and must “obtain a ruling upon the party's request, objection, or
motion.” By failing to raise the issue of default at trial, respondent has failed to
preserve it for appellate review. See, e.g., Basmas v. Wells Fargo Bank N.A., __ N.C.
App. __, __, 763 S.E.2d 536, 539 (2014), which held:
Plaintiffs argue that the trial court erred by finding that
their default on the loan after entry of [an earlier order]
constituted new facts or circumstances[, and] . . . assert
that their mortgage debt was discharged in bankruptcy[.] .
. . We do not reach the merits of this issue, because
plaintiffs failed to preserve for appellate review the effect
of a discharge in bankruptcy on the foreclosure action.
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For the reasons discussed above, we conclude that the trial court did not err
and that its order must be
AFFIRMED.
Judges STEPHENS and McCULLOUGH concur.
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