An inconspicuous house, tucked away in a cul-de-sac just a few miles to the Charlotte side of Lake Wylie, is at the center of a legal odyssey, one that started with barely $200 in unpaid homeowners’ association dues. Then came a foreclosure sale, later declared void, in which an investment company scooped it up for less than $3,000 and promptly flipped it for a fifty-fold profit. And now it appears that the North Carolina Supreme Court will decide who gets to keep it, after a fractured Court of Appeals panel ruled in the investors’ favor.
In 2016, The Crossings Community Association filed a lien against a property owned by Calmore and Hygiena Jennifer George and began foreclosure proceedings. The HOA attempted to serve notice on the Georges by having a sheriff’s deputy leave copies of the notice at the house. But while the Georges owned the house, they live in the Virgin Islands and say they only visited the property perhaps once a year; state law requires that notice be served on a person at their “dwelling house or usual place of abode.”
A Mecklenburg County clerk permitted the foreclosure sale to take place. (The deputy mistakenly reported that she served Hygiena, when in fact she had served the Georges’ daughter, who lived in the house and said she was “Jennifer.”) The successful buyer at auction, KPC Holdings, landed the house for just $2,650. It then sold the property to National Indemnity Group for a promise to pay $150,000.
After the Georges learned about the sale, they filed a motion to have it set aside. Mecklenburg County Superior Court Judge Nathaniel Poovey entered orders setting aside the foreclosure and canceling the foreclosure deed conveyed to KPC, which KPC and National Indemnity appealed.
Lakefront bargain hunt
The three judges on the Court of Appeals panel produced three separate opinions. All three agreed that voiding the foreclosure sale was proper, but the judges disagreed over what exactly should happen next and, by implication, who should bear the cost of compensating the Georges for the loss of their house.
North Carolina law provides that title to property sold under a judgment to a “good faith purchaser for value” cannot be set aside, even if that judgment is later voided. Judge Valerie Zachary, writing the opinion of the court, said that KPC was such a good faith purchaser for value, notwithstanding the rock-bottom price it paid at auction.
“No record evidence exists that either KPC Holdings or National Indemnity had actual knowledge or constructive notice of the improper service of the foreclosure notice,” Zachary wrote. “Further, as our Supreme Court has held, the low price of the foreclosure sale alone, absent actual or constructive notice of any infirmities, is not sufficient grounds to set aside a purchase by an otherwise good faith purchaser.”
Zachary noted that the state legislature has made a specific policy decision to favor a good faith purchaser at a foreclosure over a debtor if there is a deficiency in the procedure, in order to encourage higher bids at foreclosure sales and foster reliance on the integrity of the recorded title to property.
But while the ruling was a “harsh result” for the Georges, it did not leave them without a remedy, Zachary wrote—state law permits them to seek restitution for their loss (the implication being that the HOA may be liable).
Judge Chris Dillon wrote a concurring opinion also calling the outcome harsh, but saying that nothing in state law requires the value paid by a good faith purchaser to be a substantial sum, so long as the buyer reasonably believed the sale was conducted properly.
Judge Wanda Bryant dissented from the court’s ruling, writing that she would have affirmed the decision to cancel KPC’s deed. Bryant contended that KPC was not an innocent purchaser acting in good faith, citing the “grossly inadequate” price it paid.
Flip or flop
Derek Adler of DeVore Acton & Stafford in Charlotte represented National Indemnity, which intervened in the case after the Georges moved to set aside the foreclosure sale. Adler said that the court, in its ruling, endeavored to establish some equity in the situation without disturbing a good-faith sale.
“I think what happened is the court saw a very unfortunate situation, and one that they are trying to make right while being bound by statute,” Adler said. “I think the majority did a really great job of saying, we’re not going to undo the good-faith conveyances to the buyers, and we’re not going to put that sort of restraint on the foreclosure process. But at the end of the opinion they say that the Georges can seek restitution.”
Preston Odom of James, McElroy & Diehl in Charlotte represented KPC Holdings. Odom could not be reached for comment on the decision.
James Galvin of Thurman, Wilson, Boutwell & Galvin in Charlotte represented the Georges. Galvin contended that canceling KPC’s deed would have avoided the harsh result issue by placing each party back in the position it was in before the improper foreclosure sale.
“I think the issue is, what is justice in this situation? We can look to protect the people that bid on HOA lien foreclosures, or we can look to protect the homeowner who was foreclosed upon unawares,” Galvin said. “When you’ve got a $200,000 [he estimated] piece of property unencumbered, and you’re walking away with it for $2,500, you need to understand that something’s not right here … our argument was that buying something for one percent of its value is not a good faith purchaser for value.”
Bryant’s dissent means that the Georges have a right to have an appeal heard by the Supreme Court, and Galvin confirmed that his clients were in the process of seeking such an appeal.
Designed to Sell
Anyone wondering how they too can get into the business of buying homes for pennies on the dollar may be disappointed to learn that attorneys for both sides said the sale of the Georges’ house was rather unusual in multiple respects. By definition, property is foreclosed upon to pay off debts, and many times those debts are worth almost as much as the property is, so foreclosure sales are often quite a lot of hassle for the profits involved.
But the Georges were in the unusual position of being free and clear of their mortgage and owing no debts aside from the $200 in unpaid HOA fees—although Galvin said that the practice of HOAs placing liens on homes over trivially small debts was disturbingly common.
“It’s rare because foreclosure purchasing is a competitive market in Charlotte,” Adler said. “This is one that just kind of fell through the cracks and no one else saw it. There was nothing in the public record that would have prevented someone else from coming in and making a much larger bid, but for some reason that didn’t happen. It just wasn’t on any other business’s radar.”
But Galvin argued that precisely because bidding on properties in foreclosure sales is a high-risk enterprise, the pool of entities that do it tends to be small, and the people tend to know each other well. That can create a conducive environment for bidders to engage price-suppressing shenanigans, although he emphasized that there was no evidence that anything of that sort happened in this case.
Galvin said that if the ruling is upheld on appeal, his clients may seek restitution from the HOA, although he said his clients would prefer to simply get their house back—and even if the HOA was found to be liable for their losses, an HOA is unlikely to have that kind of cash just lying around.
The 32-page opinion is In re George (Lawyers Weekly No. 011-033-19). The full text of the opinion is available online at nclawyersweekly.com.
Follow David Donovan on Twitter @NCLWDonovan