In Re Foreclosure of Sutton Investments, Inc.

PARKER, Judge.

On this appeal respondent does not dispute either that the Note and the Deed of Trust are genuine or that the $17,947.27 balance due on the second annual installment on the note was not tendered until more than thirty days after 10 November 1978, the date on which the annual installment was due. Rather, relying upon the lаnguage of the Note and Deed of Trust, respondent contends that the judge erred in determining that petitioners were entitled to foreclose under the terms and conditions contained in the Deed of Trust.

The Deed of Trust and the Note both bear date 9 November 1976, and each instrument refers specifically to the other. There is no question that the Deed of Trust was executed to secure payment of the $1,060,000.00 balance of purchase price owed to Richardson and evidenced by the Note. The pertinent provisions of the Note with respect to default and the holder’s option to accelerate read:

In the event of: (1) failure to pay any interest or any installment of principal, or any portion of either, or any other sums required to be paid by this Note and the Deed of Trust of even date herewith, within thirty (30) days after the same become due and payable; or (2) failure to pеrform and comply with any and all of the other covenants, terms and provisions of this Note and/or the Deed of Trust of even date herewith and the continuance of such default (i.e. any default other than the payment of principal and interest, or any portion of either) for a period of thirty (30) days after receipt of written notice thereof, then in any of said events said principal sum and all advancements made pursuant to the provisions of said Deed of Trust, together with all unpaid interest, shall be at once due and payable at the option of the holder hereof, its successors or аssigns, and be collectible without further notice. (Emphasis added.)

The Deed of Trust provides that the debt may be accelerated and the power of sale exercised by the trustee as follows:

[I]f the party of the first part [Sutton] fails to make any payment required in the Note hereby secured or of thе interest on same, or of any part of either, or of any taxes, charges and assessments within thirty (30) days after the same shall become due and payable, or if default be made with reference to procuring, paying for, assigning and keeping in force policies of insurance as herein providеd, or if default be made in the due fulfillment of the covenants and agreements or any of them herein contained, and such default shall continue for thirty (30) days after receipt of written notice from the party of the third part (Richardson) to the party of the first part (Sutton) ....

The parties are in agreement thаt the Deed of Trust and the Note are consistent in specifying the omissions which constitute default. They are further in agreement that such default is the first ‍​‌​​‌​‌‌‌‌‌‌​​‌​‌​‌‌​​‌​​‌‌​‌​​​‌​​‌‌‌​​‌​‌‌​‌‌‌‍precondition to acceleration of the debt and exercise of the power of sale. The dispute arises as to the second precоndition, that is, the time period for which the omission or default must continue before the mortgagee’s power to accelerate the debt and the trustee’s power to sell the encumbered property arise.

Respondent contends that before the holder of the Note may accеlerate the debt and the Trustee may exercise his power of sale pursuant to the terms of the Deed of Trust, the mortgagor’s omission to perform any duty must continue for a period of thirty days after receipt of written notice thereof Thus, because the mortgagee, Richardson, at no time gave written notice to Sutton of its default in payment of principal and interest due on the 1978 annual installment, respondent contends that Richardson had no power to accelerate the debt or to order the substitute trustee to exercise the power of sale under the Deed of Trust, and that the judge erred in finding that petitioner-mortgagee was entitled to proceed with foreclosure. We do not agree.

It is well settled that a power of sale contained in a deed of trust must be exercised in strict conformity with the terms of the instrument. Brown v. Jennings, 188 N.C. 155, 124 S.E. 150 (1924); Ferebee v. Sawyer, 167 N.C. 199, 83 S.E. 17 (1914). Such powers of sale are contractual, Eubanks v. Becton, 158 N.C. 230, 73 S.E. 1009 (1912), and ordinary rules of contract govern their interpretation. The general rule of contract is that “[a]ll contеmporaneously executed written instruments between the parties, relating to the subject matter of the contract, are to be construed together in determining what was undertaken.” Yates v. Brown, 275 N.C. 634, 640, 170 S.E. 2d 477, 482 (1969). Thus, where a note and a deed of trust are executed simultaneously and each contains references to the other, the documents are to be considered as one instrument and are to be read and construed as such to determine the intent of the parties. Bank v. Belk, 41 N.C. App. 356, 255 S.E. 2d 421 cert. denied 298 N.C. 293, 259 S.E. 2d 911 (1979); see, Frye v. Crooks, 258 N.C. 199, 128 S.E. 2d 257 (1962). Of course, if the language in the separate instruments defining the conditions upon which a power of sale may be exercised is contradictоry, language in a deed of trust expressly limiting the exercise will govern. Worley v. Worley, 214 N.C. 311, 199 S.E. 82 (1938).

Applying these principles to the present case, we conclude initially that proper interpretation ‍​‌​​‌​‌‌‌‌‌‌​​‌​‌​‌‌​​‌​​‌‌​‌​​​‌​​‌‌‌​​‌​‌‌​‌‌‌‍of the provisions in the Note and the Deed of Trust prescribing the conditions of default re quires that the instruments be read together as one contract rather than as two independent agreements. Thus, the “problem is not what the separate parts mean, but what the contract means when considered as a whole.” Simmons v. Groom, 167 N.C. 271, 275, 83 S.E. 471, 473 (1914).

The provisions at issue in the present case are those in the Deed of Trust and those in the Note сoncerning default and acceleration. Although similar, they are not identical. The parties have stipulated on this appeal that original drafts of the Note and Deed of Trust were prepared by counsel for Sutton, the mortgagor, and that these drafts contained consistent clauses regаrding the rights of Richardson in the event of failure of Sutton to pay principal and interest or failure to comply with all terms and conditions of the Note and Deed of Trust. On 9 November 1976 counsel for both parties met to discuss revisions of several of the exhibits to the purchase agreement, including the Promissory Note and the Deed of Trust. Subsequent to that meeting, the form of the Note was revised although the Deed of Trust remained unchanged.

Respondent mortgagor contends that the express language of the Deed of Trust requires that written notice be given in the event of any default and that the right to foreclose does not arise until thirty days after such notice, despite the “apparently inconsistent terms” in the Note. In support of this contention respondent relies upon the decision of our Supreme Court in Worley v. Worley, supra.

In Worley, the mortgagors executed four notes, the first of which specified that interest was “due and payable annuаlly.” The deed of trust securing payment of the notes, however, included a provision for power of sale “if default be made in the payment of said bonds or the interest on same, or any part of either at maturity . . . .” 214 N.C. at 312, 199 S.E. at 82. Upon the mortgagors’ failure to pay interest on the first note at the end of one year, the mortgagee attempted to foreclose under the power of sale, which foreclosure was enjoined. In permitting recovery in an action brought by the mortgagors to recover damages for losses on account of the unlawful foreclosure, the Supreme Court held that the language in which the power of sale was conferred in the mortgage limited the right to sell, despite the inconsistent reference in the note to annual payment of interest: “The court cannot shorten the time on which the parties have expressly agreed.” 214 N.C. at 313, 199 S.E. at 83.

Worley v. Worley, supra, is clearly distinguishable from the case now bеfore us. Here, although the relevant provisions in the Note and in the Deed of Trust are not identical, they are not inconsistent. The Deed of Trust first specifies that acceleration may occur if the mortgagor “fails to make any payment required in the Note hereby secured or of the interest оn same, or of any part of either, or of any taxes, charges and assessments within thirty (30) days after the same shall become due and payable.” In the same sentence, it is specified that acceleration may occur “if default be made with reference to procuring, paying for, assigning and keeping in force policies of insurance as herein provided, or if default be made in the due fulfillment of the covenants and agreements or any of them herein contained, and such default shall continue for thirty (30) days after receipt of written notice from the [mortgagee] to the [mortgagor].” Evеn without reference to the terms of the Note, a logical interpretation ‍​‌​​‌​‌‌‌‌‌‌​​‌​‌​‌‌​​‌​​‌‌​‌​​​‌​​‌‌‌​​‌​‌‌​‌‌‌‍of this language is that there is a right of acceleration and foreclosure upon the failure of the mortgagee to pay principal, interest, or taxes, charges and assessments within thirty days from the date due without regard to notice, but that there is no such right upon the failure of the mortgagor to comply with the provisions requiring it to maintain insurance or to comply with the other covenants and agreements between the parties unless written notice has been given and thirty days has elapsed since the giving of the notice. Default in the payment of principal, interest, and taxes are events clearly within the knowledge of the mortgagor. Default in the fulfillment of other covenants and agreements, such as default in maintaining the property in good order and repair or in maintaining the proper amount of insurance, are events more peculiarly within the knowledge of the mortgagee, and written notice may be necessary to apprise the mortgagor of defaults of this character.

That this interpretation correctly reflects the intention of the parties is confirmed by the language of the Note itsеlf. In the revised Note the parties have underscored the distinction between the different types of events constituting default, using the number “(1)” to set off default in payment of any installment of principal or interest or any other sums from the due date, and the number “(2)” to set off the failure to comply with “any and all of the other covenants, terms and provisions” of the Note and the Deed of Trust, “i.e. any default other than the payment of principal and interest, or any portion of either" (Emphasis added). This latter type of default is the only one as to which notice must be given. Under this interpretation of the agreement, petitioner Richardson, as mortgagee, had no duty to give written notice to respondent Sutton of default in the payment of the annual installments of principal and interest. Thus, the mortgagee’s acceleration of the debt and the trustee’s commencement of foreclosure proceedings after respondent’s failure to рay the amount due on its annual installment of $17,947.27 by December 10, 1978 were fully authorized under the parties’ agreement, and the judge correctly so found.

Relying upon G.S. 25-1-208, respondent mortgagor next contends that even if the undisputed facts establish as a matter of law that Richardson had a right to acceleratе the debt, Richardson’s lack of good faith in its decision to accelerate precludes it from exercising the power of sale contained in the Deed of Trust. This contention is without merit. The statute relied upon is that portion of the Uniform Commercial Code which imposes a good faith requiremеnt upon the exercise of a secured creditor’s option to accelerate “at will” or “when he deems himself insecure.” “These clauses are clearly distinguished from default-type clauses . . . where the right to accelerate is conditioned upon the occurrence of a condition which is within the control of the debtor.” Crockett v. Savings & Loan Assoc., 289 N.C. 620, 631, 224 S.E. 2d 580, 588 (1976). As in Crockett, supra, the right of acceleration upon which Richardson’s rights depend in the present case is conditioned upon the occurrence of an event within the complete control of the debtor, i.e., compliance with the terms and conditions contained in the Note and the Deed of Trust. Thus, assuming arguendo that G.S. 25-1-208 is applicable to real property transactions, it is inapplicable ‍​‌​​‌​‌‌‌‌‌‌​​‌​‌​‌‌​​‌​​‌‌​‌​​​‌​​‌‌‌​​‌​‌‌​‌‌‌‍to the type of acceleration clause at issue in the present case.

Finally, respondent Sutton challenges the denial of its request for trial by jury upon the hearing de novo in Supеrior Court. We agree with the judge of the superior court that no trial by jury is required in hearings conducted under G.S. 45-21.16. That statute was adopted by our General Assembly in response to the decision in Turner v. Blackburn, 389 F. Supp. 1250 (W.D.N.C. 1975), which held our then existing statutory procedure for foreclosure under a power of sale contained in a deed of trust to be constitutionally defective as applied in that it provided no assurance of notice to the mortgagor nor any hearing prior to foreclosure and sale. As adopted in 1975 in response to that case, G.S. 45-21.16 was intended by the legislature to meet minimum due process requirements, not tо engraft upon the procedure for foreclosure under a power of sale all of the requirements of a formal civil action. To have done so would have been to render the private remedy as expensive and time-consuming as foreclosure by action. Thus, upon appеal from an order of the clerk authorizing the trustee to proceed with sale, the judge is limited upon the hearing de novo to determining the same four issues resolved by the clerk. In re Watts, 38 N.C. App. 90, 247 S.E. 2d 427 (1978). Those issues are: “[T]he existence 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 . . . .” G.S. 45-21.16(d). That the General Assembly did not intend to provide for a full trial by jury is also indicated by the language of G.S. 45-21.16(d) which refers to appeal “to the judge of the district or superior court having jurisdiction” (emphasis added), and of G.S. 45-21.16(e) which refers to the right of either рarty to petition the resident superior court judge or chief district court judge, “who shall be authorized to hear the appeal.” (emphasis added). Further, under our state Constitution, the right to trial by jury applies only to cases in which the prerogative existed at common law or was granted by statute at the time the Constitution was adopted. Kaperonis v. Highway Commission, 260 N.C. 587, 133 S.E. 2d 464 (1963). In Re Annexation Ordinances, 253 N.C. 637, 117 S.E. 2d 795 (1961). Clеarly, foreclosure by power of sale has historically been a private contractual remedy, see, Kornegay v. Spicer, 76 N.C. 95 (1877), and there was no right at the time our Constitution was adopted either by virtue of the common law or ‍​‌​​‌​‌‌‌‌‌‌​​‌​‌​‌‌​​‌​​‌‌​‌​​​‌​​‌‌‌​​‌​‌‌​‌‌‌‍statute to a jury determination of the type of issues to be resolved by a hearing pursuant to G.S. 45-21.16.

At the hеaring de novo held on 16 February 1979, the judge, upon competent evidence, found that Sutton was indebted to Richardson, the noteholder, that Sutton was in default, that Richardson had a right to foreclose under the terms of the Deed of Trust, and that due notice was given to Sutton. These findings support the court’s conclusion that the Substitute Trustee is entitled to proceed with foreclosure. The order appealed from is

Affirmed.

Judges Arnold and Webb concur.

Case Details

Case Name: In Re Foreclosure of Sutton Investments, Inc.

Court Name: Court of Appeals of North Carolina

Date Published: May 20, 1980

Citation: 266 S.E.2d 686

Docket Number: 7921SC535

Court Abbreviation: N.C. Ct. App.