Bank’s reformation delay leads to reversal of judicial foreclosure

A bank that waited 12 years to reform a deed of trust where it failed to secure a promissory note by the property was too late to obtain a judicial foreclosure, the North Carolina Court of Appeals ruled, reversing summary judgment in favor of the bank.  

Tia Stocks purchased a house in Garner on March 22, 2002, using a limited power of attorney executed by her father. She executed a promissory note in the amount of $88,184.50 and recorded a deed of trust for that amount, which named herself and her father as borrowers and listed First Union National Bank as the beneficiary.

First Union became Wachovia, and Stocks’ father refinanced in 2005. When he did so, he executed a new promissory note. At the same time, a new deed of trust listed Stocks as the borrower and stated she was indebted to Wachovia in the principal sum of $83,034, as evidenced by the borrower’s note. Because she was not a signatory to, or a debtor under, the note, the language of the deed of trust mistakenly secured a non-existent debt.

At first, Stocks made payments on the note. But by 2016, her father had passed away and she ceased paying. Wachovia merged with Wells Fargo, which commenced non-judicial foreclosure proceedings on the property. During the course of the proceedings, the bank learned for the first time that the note was not secured by the property. 

Wells Fargo then attempted to correct the error. The bank filed a complaint on May 26, 2017 requesting reformation of the deed of trust and a judicial sale of the property.

Stocks raised the statute of limitations as a defense. She pointed to Section 1-52(9), which applies to claims arising from mistake, and limits actions to those that were or should have been discovered three years prior to suit. The trial court disagreed and granted summary judgment to Wells Fargo. 

On appeal, the panel had the benefit of intervening authority in the form of its 2018 decision in Nationstar Mortgage, LLC v. Dean, which held that a claim to reform a deed of trust on grounds of mistake is subject to the ten-year statute of limitations found in Section 1-47(2), not the three years in Section 1-52(9).

Even applying the longer statute of limitations, however, the appellate court found the time period began to run when the deed of trust itself was executed, not when the mistake was discovered—meaning Wells Fargo was two years too late.

“It is undisputed that the Deed of Trust was executed by Ms. Stocks in January 2005 and that Wells Fargo filed its complaint twelve years later, on 26 May 2017,” Judge Lucy Inman wrote. “Wells Fargo’s claim for reformation, then, was filed two years after the limitations period provided by Section 1-47(2) had expired.”

Battle of the SOLs

Stocks argued on appeal that the trial court improperly rejected the three-year statute of limitations found in Section 1-52(9), “for relief on the ground of fraud or mistake; the cause of action shall not be deemed to have accrued until the discovery by the aggrieved party of the facts constituting the fraud or mistake.”

In response, Wells Fargo urged the panel to apply the ten-year limitation found in Section 1-47(2) for actions “upon a sealed instrument or an instrument of conveyance of an interest in real property, against the principal thereto.”

However, Inman wasted little ink on the battle between the statute of limitations because of precedent established after the trial court’s ruling in Nationstar Mortgage. That case concluded that Section 1-47(2) won the day.

“Consistent with Nationstar Mortgage, we hold that Section 1-47(2) governs Wells Fargo’s reformation claim,” Inman wrote. “Thus, although the trial court may very well have properly determined that Section 1-52(9) did not bar summary judgment in favor of Wells Fargo, that determination is immaterial if, following Nationstar Mortgage, Section 1-47(2) applies to the exclusion of Section 1-52(9).”

When two statutes overlap, the statute “special and particular” controls over the statute general in nature, Inman said. As explained in Nationstar Mortgage, the deed of trust in question was clearly a sealed instrument of conveyance of an interest in real property, meaning Section 1-47(2) trumped.

Clock starts … 12 years ago

Even with the longer statute of limitations period, however, Wells Fargo ran out of time.

North Carolina common law provides that, for statute of limitations purposes, “a cause of action accrues at the time the injury occurs … even when the injured party is unaware that the injury exists,” Inman explained. Looking again to Nationstar Mortgage, the panel noted that the claim in that case began when the deed of trust was executed – not when the mistake was discovered.

“We hold that Wells Fargo’s claim accrued on—and the statute of limitations runs from—the date the Deed of Trust was executed,” Inman wrote. “Because the unreformed Deed of Trust fails to secure the Note, Wells Fargo’s claim for judicial sale cannot stand. Entry of summary judgment on this claim in favor of Wells Fargo is similarly reversed.”

 In a dissenting opinion, Judge John Arrowood expressed his disapproval with the majority’s approach. The panel should not have considered whether the action was timed barred under Section 1-47(2) since Stocks specifically argued the statute did not apply, he wrote, and the determination of when a party should have discovered the fraud or mistake is a question of fact to be resolved by a jury. 

Kathleen O’Malley of the Janvier Law Firm in Raleigh represented Stocks. “The opinion is good news in terms of certainty for people who believe they have settled documents such as mortgages and property rights,” she said. “It also indicates that banks need to be a little bit more careful about the documents they draft and review.”

Raleigh attorney John T. Benjamin Jr., who represented the bank, did not respond to a call requesting comment. 

The 18-page decision is Wells Fargo Bank, N.A. v. Stocks (Lawyers Weekly No. 011-175-19). The full text of the opinion is available online at nclawyersweekly.com.