Roy Randolph Carpenter and Penny Averette Carpenter

UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF NORTH CAROLINA
RALEIGH DIVISION
IN RE:
ROY RANDOLPH CARPENTER, JR. and
PENNY AVERETTE CARPENTER,
Debtors.
Case No. 09-03678-8-SWH
Chapter 13
______________________________________________________________________________
ORDER
This case is before the court on the debtors’ objection to a proof of claim filed by
Franklin SIS Corporation. A hearing took place in Raleigh, North Carolina on January 13, 2010.
BACKGROUND
The debtors filed a voluntary petition for relief under chapter 13 of the Bankruptcy Code
on May 4, 2009. On June 3, 2009, Franklin SIS Corporation (“Franklin”) filed a proof of claim
asserting a lien against real property in Stem, North Carolina, pursuant to a series of land sale
contracts in the total amount of $131,445.28. The debtors and Franklin entered into the first land
sale contract for the purchase of the subject property in March 1997. Under the terms of the
contract, the debtors agreed to pay the sum of $102,615.00 for the property. The contract further
reflects that the debtors paid $12,000.00 at the time of execution. The remaining balance was to
SO ORDERED.
SIGNED this 02 day of March, 2010.
________________________________________
J. Rich Leonard
United States Bankruptcy Judge
____________________________________________________________
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be paid in 360 monthly installments of $696.67, at an annual rate of 8.2 percent. Franklin agreed
to convey title to the debtors by general warranty deed upon the satisfaction of six monthly
installments, or alternatively, upon the payment of $500 toward the principal amount of the
purchase price. The contract further noted that the remaining balance of the purchase price
would be evidenced by a promissory note, and that payment of such balance would be secured
by a purchase money deed of trust against the property.
As agreed upon, the debtors paid $500.00 towards the principal of the purchase price.
Accordingly, on April 17, 1997, Franklin conveyed the property to the debtors by general
warranty deed (the “1997 deed”). The 1997 deed was secured by a promissory note and deed of
trust, which was recorded. Several years later, the debtors experienced financial difficulties and
defaulted under the terms of the note and deed of trust. On May 20, 2003, as a result of their
inability to make payments, the debtors executed a general warranty deed (the “2003 deed”) for
the property to Franklin. Franklin accepted the 2003 deed in lieu of foreclosure. The 2003 deed
was then placed into one of Franklin’s files, unrecorded. The debtors never relinquished control
of the property.
A week later, on May 27, 2003, Franklin and the debtors entered into a second land sale
contract which contained the same terms as the first. No new note or deed of trust were executed
in relation to the second land sale contract because the parties anticipated that the 2003 deed
would be returned to the debtors. However, the debtors were never again successful in fulfilling
the terms of the contract under which title was to be conveyed. Instead, over the course of the
next several years, the parties continued to enter into multiple land sale contracts. This occurred
when the debtors would fall behind in payments or when Franklin would lend additional sums of
money to the debtors. Each “new” land sale contract was more of an “updated” contract,
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reflecting the most recent balance owed by the debtors to Franklin. However, no further
promissory note or deed of trust were executed. On May 4, 2009, the debtors filed their
bankruptcy petition. Subsequent to the petition date, Franklin recorded the 2003 deed.
The debtors object to the proof of claim on the basis that the original, and only, deed of
trust was rendered obsolete by the 2003 deed and subsequent land sale contracts. Therefore, the
debtors contend that Franklin’s claim is unsecured. On the other hand, Franklin asserts that all
later dealings had no effect on the original contract, which remains secured by the deed of trust.
Thus, the court must determine if the deed of trust, executed in 1997, grants Franklin a secured
interest.
ANALYSIS
Under North Carolina law, an unrecorded, but written conveyance of land is valid as
between the executing parties. Daniel v. Wray, 158 N.C. App. 161, 171-72, 580 S.E.2d 711, 719
(2003). However, for a conveyance to be good against third parties, it must be recorded. N.C.
Gen. Stat. § 47-18(a); Beasley v. Wilson, 267 N.C. 95, 97, 147 S.E.2d 577, 579 (1966). The
1997 deed, which was secured by the related deed of trust, is the only deed of record on the
petition date. Therefore, it follows that while the unrecorded 2003 deed may have been valid as
between the debtors and Franklin, it was ineffective against the rest of the world.
Nevertheless, the debtors argue that the conveyance of the 2003 deed to Franklin
rendered the original deed of trust invalid. It is true that when the holder of a deed of trust also
becomes the owner of that which is secured, the doctrine of merger invalidates the deed of trust.
However, the doctrine of merger does not apply“[w]here the mortgagee means to keep the
security alive for his own protection as against other lien or encumbrances, and also where the
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conveyance is not intended by the parties to be in satisfaction of the mortgage debt, but only as
additional security for it.” Washington Furniture Co. v. Potter, 188 N.C. 145, 146-47, 124 S.E.
122, 123 (1924)(quoting 27 Cyc., 1379). Here, the parties did not intend that the conveyance of
the 2003 deed be in satisfaction of the debt represented by the deed of trust. Rather, the 2003
deed was intended as additional security for the obligation under the deed of trust. As a result,
the deed of trust is valid.
At the hearing, the question of whether the deed of trust also secures the various land sale
contracts executed from 2003 forward was raised. The court finds that the note executed in
relation to the debtors’ original land sale contract, secured by the deed of trust, is the only
secured obligation owed to Franklin. No new note or deed of trust were executed after 1997.
Furthermore, there is no evidence that any of the latter transactions were meant to nullify or
relate back to the note and deed of trust. Therefore, if anything, the subsequent land sale
contracts created an unsecured obligation. As a result, the debtors’ obligation remains secured
and enforceable only to the extent that it is evidenced by the original promissory note and deed
of trust.
CONCLUSION
Based on the foregoing, the debtors’ objection to Franklin’s claim is DENIED. Franklin
is entitled to a secured claim based on the appropriate computation of the amount due under the
original agreement less any payments made by the debtors to Franklin.
END OF DOCUMENT
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