COA: Deed Of Trust Canceled Without Authorization Enjoys Priority Over Later Deed Of Trust, Despite Later Lender's Reliance On Cancellation

Today in Household Realty Corp. v. Lambeth the Court of Appeals (COA) addressed a priority issue concerning deeds of trust. A deed of trust held by the first lender was fraudulently canceled by the unauthorized act of a third party. In reliance on that cancelation, a second lender furnished a loan and obtained a deed of trust. When the unauthorized cancellation came to light, a priority dispute arose: which deed of trust should have priority to be a superior lien on the property?

The trial court held that the first deed of trust, the one canceled without authorization, should have priority. The trial court ordered that it be reinstated as a lien on the property effective from its original recordation date. The second lender appealed, arguing that, because it relied on the recorded cancellation, it should have a superior lien. The COA agreed with the trial court, holding that the first deed of trust was entitled to priority over the second lender's deed of trust, even though the second lender made its loan in reliance on the presumed validity of the record cancellation. The COA relied on a 1992 COA decision and a 1927 NC Supreme Court case.

The COA acknowledged that the Fourth Circuit had read NC law differently; the Fourth Circuit, in 1995, had articulated "the following rule of North Carolina law: a subsequent lien creditor with a properly recorded deed of trust enjoys priority, despite the unauthorized cancellation of a prior deed of trust, if the subsequent creditor obtains its deed of trust after the cancellation has occurred, in reliance on the cancellation's validity, and without knowledge that the cancellation was unauthorized." The COA concluded that the Fourth Circuit was relying on dicta from a NC Supreme Court decision.