Angell, Trustee v. Wells Fargo Bank, N.A.

UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF NORTH CAROLINA
WILMINGTON DIVISION
IN RE:
CHRISTOPHER WELLS HARPER and
JANICE DANIELLE HARPER,
DEBTORS.
JAMES B. ANGELL, CHAPTER 7 TRUSTEE
FOR CHRISTOPHER WELLS HARPER and
JANICE DANIELLE HARPER,
Plaintiff,
vs.
WELLS FARGO BANK, N.A., AS TRUSTEE
FOR THE CERTIFICATE HOLDERS OF
SOUNDVIEW HOME LOAN TRUST 2007-OPT-
1, ASSET-BACKED SECURITIES, SERIES 2007-
OPT1,
Defendant.
CASE NUMBER: 10-07510-8-JRL
CHAPTER 7
ADVERSARY PROCEEDING
NO. 	11-000167-8-JRL
ORDER
This matter came before the court on the defendant’s motion to dismiss. A hearing was
SO ORDERED.
SIGNED this 25 day of January, 2012.
________________________________________
J. Rich Leonard
United States Bankruptcy Judge
____________________________________________________________
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1 Following the hearing, the parties continued to brief the relevant issues extensively.
The last memorandum was submitted to the court on December 7, 2011.
2 The deed of trust was recorded on March 14, 2007 at Book 5154, Page 808, in the
Office of the Register of Deeds of New Hanover County.
2
held on November 21, 2011, in Raleigh, North Carolina to consider the motion.1
BACKGROUND
The debtors filed for relief under chapter 7 of the Bankruptcy Code on September 15,
2010. The present adversary proceeding arises out of a 2007 loan transaction that was secured
by certain real estate of the debtors.
On March 13, 2007, Mr. Christopher W. Harper (“male debtor”) executed a promissory
note in the amount of $170,000.000 for the benefit of Option One Mortgage Corporation
(“note”). On that same day, both debtors executed a deed of trust for the benefit of Option One
Mortgage Corporation (“deed of trust”), pledging the real property located at 310 Ashford
Avenue, Wilmington, North Carolina (“the property”) as collateral for the male debtor’s
obligation under the note.2 The defendant, Well Fargo, N.A., as trustee for Certificate Holders of
Soundview Home Loan Trust 2007-OPT-1, Asset-Backed Securities, Series 2007-OPT1 (“Wells
Fargo”), is the current holder of the underlying note and also holds the beneficial interest under
the deed of trust.
The male debtor defaulted on his obligations under the note, and a substitute trustee was
appointed on July 31, 2009. Subsequently, pursuant to the terms of the deed of trust, the
substitute trustee initiated foreclosure proceedings against the property. In April 2010, the
property was auctioned under the power of sale clause contained in the deed of trust. On May
17, 2010, the substitute trustee executed a trustee’s deed, conveying the property to Wells Fargo
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3 The trustee’s deed was recorded at Book 5486, Page 1586, in the Office of the Register
of Deeds of New Hanover County.
4 The quitclaim deed was recorded at Book 5508, Page 1442, in the Office of the Register
of Deeds of New Hanover County.
5 Specifically, the quitclaim deed provides:
THE PURPOSE OF THIS QUITCLAIM DEED IS TO RESCIND THE EFFECT OF
THAT CERTAIN TRUSTEE’S DEED RECORDED ON MAY 18, 2010 IN BOOK
5486 PAGE 1586, New Hanover PUBLIC REGISTRY AND TO RESTORE THE
STATUS QUO ANTE, MEANING THAT THIS CONVEYANCE IS SUBJECT TO,
WITHOUT LIMITATION, THAT CERTAIN DEED OF TRUST RECORDED ON
MARCH 	14, 	2007 	IN 	BOOK 	5154, 	PAGE 	808, 	New 	Hanover 	PUBLIC
REGISTRY[.] FURTHER, THIS CONVEYANCE IS MEANT TO EFFECTUATE
THAT CERTAIN ORDER ENTERED IN New Hanover COUNTY 09sp950
RESCINDING THE FORECLOSURE SALE.
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as the high bidder at the sale (“trustee’s deed”). The trustee’s deed was recorded on the
following day.3
Sometime thereafter, the substitute trustee was notified by the New Hanover County
Clerk of Court (“Clerk”) that a notice of sale was not included in the foreclosure file. In
response, the substitute trustee moved the Clerk to set aside the foreclosure sale. On August 17,
2010, the Clerk entered an order setting aside the foreclosure sale. Wells Fargo then transferred
the property to the male debtor by quitclaim deed, which was recorded on September 2, 2010
(“quitclaim deed”).4 The quitclaim deed purports to reinstate the deed of trust and re-encumber
the property subject to the terms of the deed of trust.5
In the weeks that followed, the debtors filed for relief pursuant to chapter 7 of the
Bankruptcy Code. The plaintiff-trustee commenced this adversary proceeding on May 16, 2011,
alleging two claims in the alternative: (1) a claim to quiet title to the property, and (2) a claim to
declare that the trustee’s deed to the defendant is an avoidable fraudulent transfer. On July 27,
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2011, Wells Fargo filed the present motion to dismiss.
STANDARD OF REVIEW
A pleading which states a claim for relief must contain “a short and plain statement of the
claim showing that the pleader is entitled to relief . . . .” Fed. R. Civ. P. 8(a)(2); Fed. R. Bankr.
P. 7008. In determining whether the plaintiff has failed to state a claim upon which relief can be
granted, the court must accept as true all pleaded allegations and view the complaint in the light
most favorable to the plaintiff. Hatfill v. New York Times Co., 416 F.3d 320, 329 (4th Cir.
2005). However, “[t]he tenet that a court must accept as true all of the allegations contained in a
complaint is inapplicable to legal conclusions.” 	Ashcroft v. Iqbal,129 S. Ct. 1937, 1949 (2009).
Under Rule 12(b)(6) of the Federal Rules of Civil Procedure, as adopted by the Federal Rules of
Bankruptcy Procedure, a party may move to dismiss a complaint for failure to state a claim upon
which relief can be granted. Fed. R. Civ. P. 12(b)(6); Fed. R. Bankr. P. 7012(b). To survive a
motion to dismiss under Rule 12(b)(6), a complaint must contain “sufficient factual matter,
accepted as true, to state a claim to relief that is plausible on its face.” Iqbal, 129 S. Ct. at 1949
(2009) (citations and quotations omitted).
Heightening pleading requirements under the Federal Rules of Civil Procedure, the
Supreme Court held that a statement showing entitlement to relief “demands more than an
unadorned, the-defendant-unlawfully-harmed-me accusation.” Id. at 1949. A claim is facially
plausible when the facts alleged in the complaint allow the court to draw a “reasonable
inference” that the defendant is liable for the alleged misconduct. Id. “[W]here the well-pleaded
facts do not permit the court to infer more than the mere possibility of misconduct, the complaint
has alleged—but it has not ‘shown’— ‘that the pleader is entitled to relief.’” Id. at 1950 (citation
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6 This rule is made applicable in this adversary proceeding by Rule 7012(b) of the
Federal Rules of Bankruptcy Procedure.
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omitted).
DISCUSSION
The plaintiff’s claims are pled in the alternative. First, the plaintiff claims a right to have
title to the property quieted, pursuant to N.C. Gen. Stat. § 41-10, to reflect that the deed of trust
does not encumber the property, as the property was validly conveyed to the male debtor by the
quitclaim deed. However, if it is determined that the transfer of property to the male debtor via
the quitclaim deed was not a valid conveyance, the plaintiff brings an alternative action against
the defendant to declare that the trustee’s deed to Wells Fargo is avoidable as a fraudulent
transfer pursuant to 11 U.S.C. § 548, and therefore, Wells Fargo is liable to the trustee on behalf
of the bankruptcy estate for the recovery of the property, or the value of the property, pursuant to
11 U.S.C. §§ 550, 551. Wells Fargo moved the court to dismiss the plaintiff’s complaint on the
grounds that it fails to state a claim upon which relief can be granted, pursuant to Rule 12(b)(6)
of the Federal Rules of Civil Procedure.6
A. Action to quiet title
There are essentially three issues of law presented by the plaintiff’s quiet title action: (1)
whether the Clerk had authority to set aside the foreclosure sale and vacate the trustee’s deed
that was recorded following the sale; (2) what is the legal effect of the quitclaim deed from Wells
Fargo to the male debtor; and (3) does the presumption of acceptance apply to the conveyance of
the quitclaim deed.
1. Clerk’s authority to set aside the foreclosure sale and vacate the trustee’s deed
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In support of its motion to dismiss, Wells Fargo argues that the Clerk has authority to set
aside the foreclosure sale, when—as is the case here—the basis for such relief is a procedural
defect. Although this authority is not explicitly granted by statute, Wells Fargo argues that Rule
60 of the North Carolina Rules of Civil Procedure inherently authorizes the Clerk to take such
action. Furthermore, Wells Fargo argues that the effect of the Clerk’s order setting aside the
foreclosure was to void the trustee’s deed, and therefore, the property was never conveyed to
Wells Fargo.
The plaintiff contends that the Clerk was without authority to set aside the foreclosure
sale or vacate the trustee’s deed, as these are equitable actions over which the clerk has no
jurisdiction or authority. The plaintiff cites various authorities for the proposition that the clerk
of the superior court “has no common law or equitable jurisdiction. The clerk is a court ‘of very
limited jurisdiction—having only such jurisdiction as is given by statute.’” Pruden v. Keemer,
262 N.C. 212, 216, 136 S.E.2d 604, 607 (1964) (citing Moore v. Moore, 224 N.C. 552, 555, 31
S.E.2d 690, 692 (1944)); see Johnston Cnty. v. Ellis, 226 N.C. 268, 38 S.E.2d 31 (1946).
Because there is no statute explicitly granting the Clerk authority to set aside a foreclosure sale
or vacate a trustee’s deed, the plaintiff argues that such authority can lie only with the superior
court.
The court finds that the Clerk had inherent authority to set aside the foreclosure sale
based on the lack of notice of sale. The court agrees with Wells Fargo that such authority is
based in Rule 60 of the North Carolina Rules of Civil Procedure. Rule 60(b) authorizes the court
to “relieve a party or his legal representative from a final judgment, order, or proceeding for the
following reasons: (1) Mistake, inadvertence, surprise, or excusable neglect; . . . or (6) Any other
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7 Rule 60(b) also provides that “[t]he motion shall be made within a reasonable time, and
for reasons (1), (2) and (3) not more than one year after the judgment, order, or proceeding was
entered.” In the present case, the substitute trustee filed a motion to set aside the foreclosure sale
well within one year of the sale.
8 Furthermore, under North Carolina law, defects in the foreclosure process do not void
the foreclosure deed, rather it is only voidable. Edwards v. Hair, 215 N.C. 662, 664, 2 S.E.2d
859, 860 (1939) (citing Berry v. Boomer, 180 N.C. 67, 103 S.E. 914 (1920)).
7
reason justifying relief from the operation of judgment.” N.C. R. Civ. P. 60(b)(1), (6). 7 Rule
60(c) provides that “[t]he clerk may, in respect of judgments rendered by himself, exercise the
same powers authorized in sections (a) and (b). Where such powers are exercised by the clerk,
appeals may be had to the judge in the manner provided by law.” N.C. R. Civ. P. 60(c). In this
case, the lack of notice qualifies as both a mistake and a substantial reason justifying relief from
the final order of sale entered by the Clerk.
However, while the Clerk had the inherent authority to set aside the foreclosure sale, the
court finds that the Clerk did not have the authority to set aside or vacate the trustee’s deed. An
action to set aside a deed is an equitable action, see Newman Machine Co. v. Newman, 275 N.C.
189, 166 S.E. 2d 63 (1969), and as such, it may only be raised in the superior courts, see In re
Smith, 200 N.C. 272, 274, 156 S.E. 494, 495 (1931) (“[T]he Superior Courts became the
successors of the courts of equity, having their jurisdiction and exercising their equitable powers
unless restrained by statute. The clerk of the superior court is not given the jurisdiction of a
court of equity.”) (internal citations omitted). In this case, the Clerk’s order to set aside the
foreclosure sale could not have rendered the trustee’s deed void, as the Clerk has no authority to
undo the deed.8 Even if this were not the case, the order entered here does not purport to rescind
the deed or direct Wells Fargo to reconvey the property. Wells Fargo acted entirely on its own
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volition.
There is further support for this proposition in the Procedures Manual for the Clerks of
the Superior Courts of North Carolina. In regard to foreclosures under power of sale, it provides
the following:
Motion to set aside defective sale.
a) 	Sometimes when there is a significant defect in a sale, the trustee may
seek an order to set the sale aside and begin again.
b) 	Be careful about setting aside a sale to cure a defect. 	If the final
report has been filed and the deed has been given to the
purchaser, it is too late for the clerk to set aside the sale.
Joan G. Brannon & Jan S. Simmons, North Carolina Clerk of Superior Court Procedures Manual
§ 130.43 (Clerk’s Manual Comm. ed., 2003) (emphasis added). Based on the foregoing, the
court finds that although the Clerk generally has the authority to set aside a foreclosure sale, the
August 17, 2010 order had no effect on the trustee’s deed which validly conveyed the property to
Wells Fargo on May 17, 2010. Additional action by the superior court would have been required
to rescind the deed.
2. Legal effect of the quitclaim deed from Wells Fargo to the male debtor
Because the trustee’s deed conveyed the property to Wells Fargo, the court must
determine what interest the quitclaim deed conveyed to the male debtor. Wells Fargo takes the
position that the quitclaim deed transferred the property encumbered by the deed of trust. Wells
Fargo contends that the plaintiff “cannot choose to ignore the clear language of the quitclaim
deed that provides that it intended to restore the status quo ante and that the conveyance is
subject to the [d]eed of [t]rust.” Wells Fargo bases this argument on the language of N.C. Gen.
Stat. § 39-1.1, which provides in relevant part: “In construing a conveyance . . . in which there
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are inconsistent clauses, the courts shall determine the effect of the instrument on the basis of the
intent of the parties as it appears from all of the provisions of the instrument.” N.C. Gen. Stat. §
39-1.1(a).
The plaintiff contends that the deed of trust was extinguished by the conveyance of the
trustee’s deed to Wells Fargo, and that “[w]hile the quitclaim deed transferred the property back
to the [male debtor], it cannot have the effect of reviving an otherwise satisfied [d]eed of [t]rust.”
The plaintiff argues that because no new deed of trust was executed and the male debtor lacked
any intent to revive the foreclosed deed of trust, the male debtor now owns the property free of
any encumbrances.
The court finds that the male debtor is the owner of the property by virtue of the
quitclaim deed, free of the deed of trust. The deed of trust was extinguished when the trustee’s
deed conveyed the property to Wells Fargo, who was simultaneously the holder of the deed of
trust. As this court noted, “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.” In re Carpenter, No. 09-
03768-8-SWH, 2010 Bankr. LEXIS 647, at *5 (Bankr. E.D.N.C. Mar. 2, 2010); see Washington
Furniture Co. v. Potter, 188 N.C. 145, 146, 124 S.E. 122, 123 (1924) (“It is undoubtedly the
general rule of law that, where one who holds a mortgage on real estate becomes the owner of
the fee, and the two estates are thus united in the same person, ordinarily the former estate
merges in the latter.”) (citations omitted). After merger took place and the deed of trust was
extinguished, the deed of trust needed to be again executed by the debtors to be effective under
North Carolina law. See In re Mills, 68 N.C. App. 694, 695, 315 S.E.2d 716, 717 (1984) (citing
New Home Building Supply Co. v. Nations, 259 N.C. 681, 131 S.E.2d 425 (1963)).
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9 In fact, the male debtor was unaware of the existence of the quitclaim deed until after
the debtors filed their bankruptcy petition.
10
While N.C. Gen. Stat. § 39-1.1(a) does instruct the court to resolve “inconsistent clauses”
from the “intent of the parties from all the provisions of the instrument,” it in no way allows a
party to unilaterally resuscitate an extinguished deed of trust, even if the instrument evidences
that grantor had such an intention. Furthermore, in this case, there are no inconsistent clauses in
the quitclaim deed to resolve, and there is no evidence—in the provisions of the quitclaim deed
or otherwise—supporting that the male debtor intended to re-encumber the property.9
Essentially, Wells Fargo attempted to engage in self help, which in this case, they had no
authority to do. By foregoing the proper judicial procedures applicable to obtaining equitable
relief, Wells Fargo chose to forego the protections that would have been afforded by the judicial
process. Therefore, the court finds that the quitclaim deed had the legal effect of transferring the
property to the debtor, free and clear of the deed of trust or any other encumbrances.
3. Presumption of acceptance
“Where a deed is executed and recorded, it is presumed that the grantee therein will
accept the deed made for his benefit. This is so, although the transaction occurs without the
grantee’s knowledge. Such presumption will prevail in the absence of evidence to the contrary.”
Corbett v. Corbett, 249 N.C. 585, 590, 107 S.E.2d 165, 170 (1959) (citations omitted).
However, “[n]o presumption of acceptance would arise . . . [where] a deed imposes affirmative
obligations on the grantee. Messer v. Laurel Hill Assoc., 93 N.C. App. 439, 444–445, 378
S.E.2d 220, 224 (1989) (citing Beaver v. Ledbetter, 269 N.C. 142, 152 S.E.2d 165 (1967)).
In this case, it is undisputed that presumed acceptance is the only plausible theory of
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10 The court questions whether a deed of trust qualifies as imposing an affirmative
obligation on the grantee. See Whetsell v. Jernigan, 291 N.C. 128, 229 S.E.2d 183 (1976) (find
that building a church on the conveyed property qualifies as an affirmative obligation); Beaver v.
Ledbetter, 269 N.C. 142, 152 S.E.2d 165 (1967) (assumption of an underlying mortgage);
Messer v. Laurel Hill Assoc., 93 N.C. App. 439, 378 S.E.2d 220 (1989) (building a road).
However, because there was not a valid deed of trust, this issue is moot.
11
acceptance. Both parties also acknowledge that the quitclaim deed was properly executed and
recorded, and that the deed was made for the benefit of the male debtor. However, the parties
dispute whether or not the language attempting to reinstate the deed of trust imposes affirmative
obligations on the male debtor. Wells Fargo argues that the encumbering of the property
imposes an affirmative obligation on the male debtor, and therefore, the presumption of
acceptance does not apply. With no presumption of acceptance, the plaintiff must allege
acceptance of the quitclaim deed, which the plaintiff failed to do. On the other hand, the plaintiff
contends that simply reciting that a deed is subject to an otherwise extinguished deed of trust
imposes no affirmative obligation on the male debtor, and therefore, the normal rule of presumed
acceptance applies in this case.
The court finds that the presumption of acceptance applies to the transfer of the quitclaim
deed. As discussed above, because the language purporting to subject the quitclaim deed to an
extinguished deed of trust is without legal effect, the property conveyed to the male debtor free
of encumbrances. That being so, the quitclaim deed imposes no affirmative obligation on the
debtor, and the presumption of acceptance applies. 10
B. Fraudulent transfer
In addition to the action to quiet title, the plaintiff-trustee alternatively seeks to avoid the
trustee’s deed as a fraudulent transfer, pursuant to 11 U.S.C. § 548(a)(1)(B). Wells Fargo
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contends that the trustee failed to sufficiently plead allegations of constructive fraud. Section
548(a)(1)(B) allows the trustee to avoid transfers made within two years of the filing of the
petition,
in which the debtor “received less than reasonably equivalent value” and either (I)
was or became insolvent on the date of the transfer; (II) became insufficiently
capitalized following the transfer; (III) intended to incur debts that would be beyond
its ability to repay; or (IV) made such transfer for the benefit of an insider under an
employment contract and not in the ordinary course of business.
Angell v. Ber Care, Inc. (In re Caremerica, Inc.), 409 B.R. 737, 756 (Bankr. E.D.N.C. 2009)
(citing 11 U.S.C. § 548(a)(1)(B)). “[Section] 548(a)(1)(B) claims must satisfy Rule 8(a) and
contain a short and plain statement showing entitlement to relief. Under Iqbal, it follows that
claims to avoid constructively fraudulent transfers must assert factual allegations which show
that relief is plausible.” Id.
The complaint alleges that “as evidenced by the Debtors’ schedules . . . the Male Debtor
was insolvent on the date the Trustee’s Deed was recorded or became insolvent as a result of the
Trustee’s Deed.” It also alleges that “[a]s a result of the procedural deficiencies in the
foreclosure of the Property, . . . the Male Debtor received less than reasonably equivalent value
in exchange for the Property as a result of the Trustee’s Deed.” 	However, the complaint
provides no factual assertions to support these allegations—only “a formulaic recitation of the
elements” of § 548(a)(1)(B). Iqbal, 129 S. Ct. at 1949 (citing Bell Atlantic Corp. v. Twombly,
550 U.S. 544, 555 (2007)). Specifically, there are no assertions as to the amount of the debt
secured by the deed of trust, the value of the property, or the amount of Wells Fargo’s bid at the
foreclosure sale. In the absence of such factual assertions as to value, the trustee’s claims based
on constructive fraud fail to meet the Rule 8 pleading standard.
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CONCLUSION
Based on the foregoing, Wells Fargo’s motion to dismiss the plaintiff’s action to have the
title to the property quieted is DENIED, and Well’s Fargo motion to dismiss the plaintiff’s
action to avoid the trustee’s deed as a fraudulent transfer is ALLOWED.
END OF DOCUMENT
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