Court Opinion

ID: 8903707
Source: CourtListenerOpinion
Date Created: 2022-11-27 01:31:57.424539+00
Date Added: 2024-06-11T17:08:01.592966
License: Public Domain

Judge Vaughn
dissenting:
The issue is whether surplus proceeds from the foreclosure sale of realty held as tenants by the entirety may be constructively deemed to be entirety property even though such proceeds are personalty. The majority holds that such proceeds take on an entirety character because they are created by an involuntary conversion of realty held by the entirety. The result is that an individual judgment creditor of the husband may not enforce its claim against the proceeds since entirety property is only subject to claims upon a joint obligation of the husband and wife. I respectfully urge that a contrary conclusion and result are dictated by an analysis of the common law features of a tenancy by the entirety, the nature of the conversion occurring at a foreclosure sale due to a default on a joint obligation, and the relevant case law of this State.
North Carolina is a “strong” tenancy by the entirety state. 47 N.C. L. Rev. 963 (1969). Our courts have long held that the estate exists as it did at common law and that it has not been changed by any statute or constitutional provision (married women property acts). Bank v. Hall, 201 N.C. 787, 161 S.E. 484 (1931); Davis v. Bass, 188 N.C. 200, 124 S.E. 566 (1924); Dorsey v. Kirkland, 177 N.C. 520, 99 S.E. 407 (1919); Bynum v. Wicker, 141 N.C. 95, 53 S.E. 478 (1906). The most distinctive characteristic of the tenancy by the entirety is the requirement that the property so held must be realty in which the unities of time, title, interest, possession and person (husband and wife) simultaneously exist for the duration of the estate. See Webster, Real Estate *82Law in North Carolina § 102 (1971); 4A Powell, The Law of Real Property 620 (1979); 4 Thompson, The Modern Law of Real Property § 1784 (Grimes ed. 1979). Thus, the rule is that when a husband and wife jointly sell entirety property, the cash proceeds thereof are held by them as tenants in common. Wilson v. Ervin, 227 N.C. 396, 42 S.E. 2d 468 (1947). Such a conclusion is necessarily compelled at common law since a sale destroys the unities of title and possession, and the property taken in exchange (the cash) is personalty.
A decision imprinting these surplus proceeds with an entirety character is, therefore, inconsistent with basic common law in two major respects. First, the foreclosure sale is still a sale, and as such, it destroys the unities of title and possession required for the existence of a tenancy by the entirety. The land foreclosed upon now belongs to another, and the Clines have no claim whatsoever to it. Second, the surplus proceeds produced by the foreclosure sale are obviously personalty, not realty, and the common law did not recognize a tenancy by the entirety in personalty. Turlington v. Lucas, 186 N.C. 283, 119 S.E. 366 (1923); Moore v. Trust Co., 178 N.C. 118, 100 S.E. 269 (1919) (concurring opinion, Clark, C J.).
The majority, nevertheless, concludes that a foreclosure sale is an involuntary conversion of entirety realty into personalty. The involuntary conversion theory creates an exception to the general rule that there can be no tenancies by the entirety in personalty. This exception, however, has only been recognized in two situations: Highway Commission v. Myers, 270 N.C. 258, 154 S.E. 2d 87 (1967) (proceeds awarded for condemnation of entirety realty are held by the entirety); and Perry v. Jolly, 259 N.C. 305, 130 S.E. 2d 654 (1963) (proceeds from the sale of entirety realty are held by the entirety when the wife is incompetent) [accord, In re Estate of Fox, 67 Misc. 2d 470, 324 N.Y.S. 2d 434 (Surr. Ct. 1971)].
Both Perry and Myers are inapposite here. In Perry, supra, the wife was unable to do a voluntary legal act, that of joining in the sale of the entirety property, because of her incompetence. Therefore, any sale of the property, was necessarily involuntary as to her which certainly justified the protective retention of the tenancy by the entirety as to the proceeds. In Myers, supra, the sole cause of the conversion of the realty into personalty was an official act of the state pursuant to its eminent domain powers. The husband and wife simply *83did not do anything. Since the act of condemnation did not involve any voluntary action by the owners, the Court held that the “involuntary appropriation [by the Commission] does not destroy the tenancy by the entirety, but merely transfers the rights of the tenants from the land to the funds.” 270 N.C. at 263, 154 S.E. 2d at 90. In this case, however, the Clines contributed to the event of a foreclosure sale by their joint execution of the deed of trust and their failure to make payments upon that joint obligation. Moreover, the involuntary conversion exception does not apply to every situation where the triggering event of the conversion is arguably involuntary. See Forsyth County v. Plemmons, 2 N.C. App. 373, 163 S.E. 2d 97 (1968) (discussed infra).
An instructive analogy here is to cases involving the award of fire insurance proceeds for the loss of entirety realty. In Hawthorne v. Hawthorne, the New York Court of Appeals refused to apply the involuntary conversion exception to fire insurance proceeds of entirety realty and stated:
If the insurance proceeds are the logical substitute of anything they are the fruit of the insurance contract and the premiums paid under it. In sum, while the loss was involuntary, the draft is not a substitute forced on the parties equally involuntarily [as in the condemnation cases]; it is the product of fheir voluntary contractual act and is held by them in the same way as any personal property voluntarily acquired.
13 N.Y. 2d 82, 85, 242 N.Y.S. 2d 50, 52 (1963). The rule in Hawthorne, that the involuntary loss must be the source of the funds received, severely restricts the involuntary conversion exception, and it is doubtful that the theory has any application beyond eminent domain proceedings. 28 Albany L. Rev. 319 (1964); 49 Cornell L.Q. 559 (1964).
This Court adopted the reasoning of Hawthorne, supra, in Forsyth County v. Plemmons, 2 N.C. App. 373, 163 S.E. 2d 97 (1968). Both Hawthorne and Plemmons hold that fire insurance proceeds from entirety realty are held by the husband and wife as tenants in common. In addition, the Courts, in both cases, gave much weight to the prohibition against tenancy by the entirety in personalty and expressly found that the condemnation cases were not controlling.
It is not unusual for the permanent improvements on real estate *84to exceed the value of the underlying land many times over. In every case, the improvements represent a part of the total value of the realty or they would not be insured. A fire, therefore, converts a substantial part of the value of the realty into personalty in the form of insurance proceeds. The conversion by fire is an involuntary event as far as the owners are concerned. It would seem that a much more persuasive argument could be made for the proposition that, where the value of realty is converted into personalty by fire, the insurance proceeds should take on the attributes of that which they replace, rather than here where the conversion to personalty is triggered by the voluntary execution of a conveyance in trust. I do not believe, therefore, that Plemmons, supra, limited the applicability of the reasoning in Hawthorne v. Hawthorne, 13 N.Y. 2d 82, 242 N.Y.S. 2d 50 (1963), to those cases involving fire insurance proceeds for a building where title to the unimpaired realty, the bare land, is not transferred.
I also fail to see how the events leading up to a foreclosure can be characterized as involuntary. The parties make several critical choices: among them, whether to own real estate, what kind of estate will be used to hold the title, whether to encumber their title and the nature of that encumbrance. Admittedly, it is unusual for prospective purchasers to obtain much real property without some form of installment financing. It is equally true that financial circumstances may make it prudent to raise money on the security of real estate. These facts, however, do not mean that the conveyance of entirety property to a trustee pursuant to a deed of trust is anything other than a voluntary act even though the execution of the conveyance and subsequent default may be affected by a number of economic factors beyond the control of the parties.
Unlike the majority of jurisdictions which consider a mortgage to be a lien, in this State, the execution of a mortgage, or a deed of trust, constitutes a conveyance of legal title, in the nature of a determinable fee, to the mortgagee or trustee. Gregg v. Williamson, 246 N.C. 356, 98 S.E. 2d 481 (1957); Simms v. Hawkins, 1 N.C. App. 168, 160 S.E. 2d 514 (1968). Our State is, therefore, a member of a small minority adhering to a “title” or “conveyance” theory of mortgages in which the mortgagor retains only an equity of redemption, the right to have legal title restored upon satisfaction of the underlying debt. Webster, Real Estate Law in North Carolina §§ 228-229 (1971); Smith and Boyer, Survey of the Law of Property 338 (2d ed. 1971); Reeves, Special Subjects of the Law of Real Property §§ 459-460, at 627-28 (1904). The grantors *85here merely retained the right to redeem the property from the trustee’s legal title by paying the debt, a right they did not exercise.
There is substantial authority in North Carolina indicating that these surplus proceeds are not held by the entirety. In Bruce v. Nicholson, 109 N.C. 202, 13 S.E. 790 (1891), the plaintiff brought an action to foreclose upon two mortgages on entirety property executed by the husband and wife. An individual creditor of the husband moved to be made a party defendant in the foreclosure action to protect its judgment lien. The motion was denied because the creditor had no interest in the land to be foreclosed upon since it was held by the entirety. On appeal, the Supreme Court affirmed the denial of the motion because the appellants
did not ask to be made a party defendant in the action for the purpose of enforcing their supposed lien and sharing in the funds, the proceeds of the sale of the land according to their alleged right, but for the purpose of alleging collusion between the plaintiffs and defendants to the prejudice of themselves and other creditors, and to contest the validity of the plaintiff’s mortgages and debts secured by them.
109 N.C. at 206-07, 13 S.E. at 791 (emphasis added). The Court held that the creditor could not allege collusion between the parties as a defense to the foreclosure action; rather, the proper remedy was to bring an independent action on this basis. Nevertheless, it is clear that the Court assumed that the proceeds from a foreclosure sale were personalty held in common and that the husband’s share thereof would be subject to the liens of his creditors in a proper proceeding.
In addition, the cases of Porter v. Bank, 249 N.C. 173, 105 S.E. 2d 669 (1958), and 251 N.C. 573, 111 S.E. 2d 904 (1960), cannot be ignored in the determination of the issue presented here. In the second Porter case (1960), the Court held that an order for alimony pendente lite in favor of the wife could not create a lien in futuro on the husband’s share of surplus proceeds to be derived from a foreclosure sale under a deed of trust on real property owned by the couple by the entirety. Thus, the wife’s claims against her husband did not have priority over an individual creditor’s lien which had attached to the husband’s interest in the surplus after the foreclosure sale when the trustee deposited it with the clerk. 251 N.C. at 580-81, 111 S.E. 2d at 910. In both the first and the second Porter cases, the Supreme Court obvious*86ly believed that the surplus proceeds from the foreclosure were held by the husband and wife as tenants in common and that the share of each was subject to the duly attached liens of their individual creditors.
Another pertinent case is Koob v. Koob, 283 N.C. 129, 195 S.E. 2d 552 (1973). Koob involved a dispute over the distribution of surplus proceeds from a foreclosure of entirety property between the husband and wife in the wife’s action for alimony without divorce Chief Justice Bobbitt recognized the holding in Porter v. Bank, 251 N.C. 573, 111 S.E. 2d 904 (1960): “that a creditor of defendant-husband who had levied on the husband’s interest in the surplus had priority over the wife’s claim under the order providing for the payment of alimony to her.” 283 N.C. at 139, 195 S.E. 2d at 559. Although he did not appraise “the legal significance” of the difference in the facts in Koob and those in Porter, the Chief Justice, nonetheless, pointed out the following:
In Porter v. Bank, the surplus fund of $9,382.34 was the result of the foreclosure by Frank Banzet, Trustee, of a deed of trust which had been executed by the defendant-husband and the plaintiff-wife. In the present case, the surplus fund of $25,853.23 resulted from the foreclosure by Douglas, Trustee, of a deed of trust which had been executed by Harry J. Hill and wife, Mary H. Hill, prior owners of the subject realty, and not by William M. Koob and wife, Marilyn S. Koob.
Id. The Court thus seems to assume that, had the deed of trust foreclosed upon been executed by the Koobs, the holding in Porter v. Bank, 251 N.C. 573, 111 S.E. 2d 904 (1960) would clearly control.
Apparently, one noted author has misconstrued the Koob case and cited it for the proposition that a foreclosure of a deed of trust is an involuntary transfer of title which causes the proceeds to retain their entirety status. See 2 Lee, North Carolina Family Law § 114, at 49 (4th ed. 1980). Koob does not so hold. See Crumpton v. Crumpton, 290 N.C. 651, 657-58, 227 S.E. 2d 587, 592 (1976). Indeed, the Court avoided the “critical question” of whether the trustee’s foreclosure constituted a dissolution of the estate by the entirety by the voluntary joint acts of the husband and wife. Instead, the Court vacated the orders purporting to adjudge the respective rights to the surplus because the process served on the husband had been insufficient to confer jurisdiction for such adjudication. 283 N.C. at 142, 195 S.E. 2d at 561.
*87Two other jurisdictions have spurned the involuntary conversion theory as a means of avoiding the common law rule prohibiting tenancies by the entirety in personalty where surplus proceeds from a foreclosure sale upon a voluntarily executed mortgage are involved. New York and New Jersey have specifically held that such proceeds, identical to those in this case, are held in common, not by the entirety. The leading case is Franklin Square Nat. Bank v. Schiller, 202 Misc. 576, 119 N.Y.S. 2d 291 (Sup. Ct. 1950). Schiller was the first case to hold that foreclosure proceeds were held by the owners as tenants in common, and it was expressly approved as the controlling law in Hawthorne v. Hawthorne, 13 N.Y. 2d 82, 86, 242 N.Y.S. 2d 50, 53 (1963) [adopted by this court in Forsyth County v. Plemmons, 2 N.C. App. 373, 163 S.E. 2d 97 (1968)]. Two cases following the Schiller result are Nat. Bank & Trust v. Rickard, 57 App. Div. 2d 156, 393 N.Y.S. 2d 801 (3d Dept. 1977) and Fort Lee Savings & Loan Association v. LiButti, 106 N.J. Super. 211, 254 A. 2d 804 (App. Div. 1969), rev’d per curiam, 55 N.J. 532, 264 A. 2d 33 (1970). In Rickard, the Court explained the result by stating: “Here the giving of the mortgage, the vehicle which authorized the sale, was a voluntary act of the husband and wife and the authorized sale merely an incident in producing the fund.” 57 App. Div. 2d at 158, 393 N.Y.S. 2d at 802. Accord, Mojeski v. Siegmann, 87 Misc. 2d 690, 386 N.Y.S. 2d 609 (Sup. Ct. 1976), aff’d, 57 App. Div. 2d 549, 392 N.Y.S. 2d 1021 (3d Dept. 1977). In its reversal of Fort Lee Savings and Loan, the New Jersey Supreme Court adopted the reasoned dissent of Judge Carton (from the lower court). 55 N.J. at 533, 264 A. 2d at 33. Judge Carton concluded that the involuntary conversion theory could not be used to impress the foreclosure proceeds with a tenancy by the entirety because
It establishes an exception to the salutary rule that tenancies by the entirety may not exist in personal property and by means of a fiction extends in a new form a type of tenancy whose values has [sic] been widely questioned even so far as it applies to real property.
Mortgagors, in executing mortgages, must certainly be held to have understood both that they must pay the amount which the mortgage secures and that their interest in the property may be cut off by foreclosure and sale of the property in the event of a default. The foreclosure and sale *88are steps in a process entirely consensual in its origin and nature.
106 N.J. Super, at 214, 217, 254 A. 2d at 806, 807-08. See Pulawski Savings & Loan Association v. Aguiar, 174 N.J. Super. 42, 415 A. 2d 365 (1980). Rickard and Fort Lee Savings and Loan clearly incorporate the holding of Hawthorne v. Hawthorne, 13 N.Y. 2d 82, 242 N.Y.S. 2d 50 (1963), limiting the application of the involuntary conversion theory.
It is significant that New York, New Jersey and North Carolina adhere to the minority position, among entirety jurisdictions, that there can be no such tenancy in personalty. Moynihan, Introduction to the Law of Real Property 231 (1962). Authority from other jurisdictions, which recognize tenancy by the entirety in personalty, that foreclosure proceeds are constructive entirety property, should be disregarded for purposes of determining the issue in this State. See Annot., 64 A.L.R. 2d 8, 60 (1959). In sum, the reasoned (and applicable) authority of North Carolina and other comparable jurisdictions seems to compel the conclusion that the surplus proceeds, received by the husband and wife from a foreclosure sale upon a j ointly executed deed of trust for entirety realty, are personalty held in common subject to the legitimate claims of creditors against the individual tenants.
This Court should, of course, continue to protect and enforce the right of survivorship to entirety property. This incident of the tenancy does not, however, deserve such attention here where the parties jointly executed a deed of trust. The husband and wife were both responsible for making the payments. See Wall v. Wall, 24 N.C. App. 725, 212 S.E. 2d 238, cert. denied, 287 N.C. 264, 214 S.E. 2d 437 (1975). When they conveyed title to the trustee, the Clines were aware of the consequences that could follow from their failure to comply with the trust and redeem the title to the property.
Sound public policy would seem to favor a decision that would subject the husband’s share of the surplus to the duly attached liens of his individual creditors. The tenancy by the entirety has been uniformly criticized on the basis of its use as a mechanism to avoid the claims of creditors. See Grilliot and Yocum, Tenancy by the Entirety: An Ancient Fiction Frustrates Modern Creditors, 17 Am. Bus. L.J. 341 (1979); 4A Powell, The Law of Real Property 11 623 (1979); Moynihan, Introduction to the Law of Real Property 234-35 (1962). Our own courts have criticized the tenancy often and have suggested that it be abol*89ished more than once. Moore v. Trust Co., 178 N.C. 118, 100 S.E. 269 (1919) (concurring opinion, Clark, C J.); Dorsey v. Kirkland, 177 N.C. 520, 99 S.E. 407 (1919); Bynum v. Wicker, 141 N.C. 95, 53 S.E. 478 (1906). It is, therefore, inappropriate to extend the estate by the entirety “at this late day” to personalty when it exists solely by virtue of common law which inflexibly recognized it only in realty. Gooch v. Bank, 176 N.C. 213, 97 S.E. 53 (1918).
In conclusion, I am not inadvertent to the further question concerning the distribution of these surplus proceeds among the joint creditors of the Clines and Mr. Cline’s individual creditors. See Johnson v. Leavitt, 188 N.C. 682, 686, 125 S.E. 490, 497 (1924). The majority opinion, however, makes consideration of this issue unnecessary.