United States: Void But Valid: Good-Faith Purchaser For Value Keeps Title Despite Procedural Defects In Foreclosure Sale

A divided panel of the North Carolina Court of Appeals holds that a good-faith purchaser for value at a foreclosure sale obtains a valid deed regardless of the amount paid, even where the foreclosure itself is void due to procedural errors.

Background: The Georges owned a home, free-and-clear of any mortgage, in Mecklenburg County. The Georges did not reside at the house, but their daughters lived there while attending college. The neighborhood homeowners' association filed a lien on the home for $204.75 in unpaid fees, then initiated non-judicial foreclosure proceedings. KPC Holdings purchased the house at a foreclosure sale for $2,650.22—less than 2 percent of the home's value—and subsequently sold it to National Indemnity Group for $150,000.

The Georges later brought a motion to set aside the foreclosure sale. The trial court granted the motion and set aside the order of foreclosure, the deed to KPC Holdings, and the deed to National Indemnity.

The Court of Appeals Ruling: Writing for the majority, Judge Valarie Zachary agreed that the foreclosure sale was void because the HOA did not properly serve the Georges. The Court went on to hold, however, that N.C. Gen. Stat. § 1-108 precluded the trial court from voiding the foreclosure deed because KPC Holdings was a good faith purchaser and the notice of the foreclosure sale was constitutionally sufficient. Significantly, the Court refused to consider the adequacy of the purchase price paid by KPC, stating that "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." Op. at 20. The Court also noted that the Georges were not wholly without a remedy, as they could seek restitution from the HOA. See In re: Ackah, 804 S.E.2d 794, 798 (N.C. Ct. App. 2017)

Judge Wanda Bryant dissented, arguing that KPC did not qualify as a good-faith purchaser because the consideration was "grossly inadequate." Under North Carolina's appellate rules, Judge Bryant's dissent provides the Georges with an automatic appeal to the North Carolina Supreme Court.

Bottom Line: As Judge Chris Dillon put it in his concurrence, "[t]he facts of this case produce a harsh result." The majority opinion is consistent with existing case law, and the outcome should give comfort to investors who routinely purchase foreclosed properties. Judge Bryant's dissent, however, gets to the issue of basic fairness. The average person would likely be surprised that a $200 homeowners' association lien could lead to a home being sold at foreclosure for less than two percent of its value. The decision also heightens the risk for foreclosing lien-holders, who may face a restitution claim if a foreclosure is voided but the sale allowed to stand. Given the "harsh result" in this case, the Supreme Court is likely to take a close look at whether courts should consider the adequacy of the purchase price in determining when a party qualifies as a good-faith purchaser under § 108. Businesses who routinely deal with foreclosures or foreclosed properties in North Carolina will want to monitor the case closely

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