Would-Be Buyers In Possession Under Unrecorded Purchase Agreements Say Their Land Was Mortgaged Out From Under Them By Seller

In Surry County, North Carolina, WXII-TV Channel 12 reports:

• Some Surry County residents are being forced to move after they said they bought property from a landowner. But the bank who owns the deed to the land said the properties are in foreclosure and is holding an auction for the land.

• The residents said they signed mortgage contracts with Nichols Land Company for lots in Dobson and Mount Airy. A notice of sale letter shows Nichols Land Company Holdings used the same lots as collateral on a $200,000 loan it took out in 2007. Nichols defaulted on the loan, so the bank that holds the loan now controls the land.

• "We've been there eight months and I've just been through a liver transplant. How can I move? I'm on Social Security now. How can I move? All our savings are gone," one of the residents, Debi Flannelly, said.

• Another resident, Denise Daniels, said she signed a contract with Nichols in 2001 for a 15-year loan that states she'll own the property outright in 2016. "Over the years, we've paid about $30,000 on our lot. As of yesterday, I owe $4,500," she said. A lawyer for Nichols said he hadn't investigated the legal issues and wasn't able to comment.(1) A lawyer who sent the notice of sale to the residents didn't return WXII's attempt to obtain a comment.

• The residents said they feel they've been duped. "It's just a fraud. He sold these properties to us and he used these deeds as collateral," one resident said.

Source: Residents Say They've Been Forced From Land (Bank Says Property Actually In Foreclosure).

See also, The Mount Airy News: Land company gets extension on foreclosures:

• A company accused of defaulting on a loan, which would potentially force several local residents from their homes, said Wednesday it has reached an agreement with its bank that will delay evictions.According to legal notices published in Wednesday’s edition of The Mount Airy News, 35 properties owned by Nichols Land Company would go up for public auction on March 30 at 3 p.m. at the Surry County Courthouse door.

• Nichols Land has sold hundreds of pieces of property throughout the years as a middle man between the purchaser and lending institutions, and has relied on those purchaser’s payments to meet its debt servicers. [...] Most of these individual land installment contracts in question now were drawn up more than 10 years ago, Nichols said. Nichols did at that time, and has continued to, have a note against the land, he said. The bank that holds the notes for these properties knew that land installment contracts existed when the note was procured.(2)

(1) To the extent the residents acquired their rights to the land pursuant to an unregistered or unrecorded contract for deed (a/k/a land contract, agreement for deed, conditional sales contract, installment sale contract, etc.), where that contract pre-dates the granting of a subsequently made, but earlier recorded mortgage, the residents' property rights under the unrecorded contract for deed may be superior to the recorded rights of the morgage holder. This could be the case if, at the time the mortgage was made, the residents were in possession of the land, said possession was open, notorious and exclusive, and the mortgagee failed to inquire into any legal rights or equities by which the residents held possession. In such a case, the mortgagee arguably would not qualify as a bona fide purchaser (a/k/a innocent purchaser, good faith purchaser), and consequently, would leave its rights under its later-acquired mortgage subject and subordinate to the rights of the residents, notwithstanding its earlier recording in the public record (this means that the bank has no right to foreclose on the buyers under the contracts for deed).

For support on this point from the North Carolina Supreme Court, see (bold text is my emphasis):

Morehead v. Harris, 262 N.C. 330; 137 S.E.2d 174 (1964):

• "A person is an 'innocent purchaser' when he purchases without notice, actual or constructive, of any infirmity, and pays valuable consideration and acts in good faith." Lockridge v. Smith, 206 N.C. 174, 173 S.E. 36.

***

• The burden of proof of the "innocent purchaser" issue is upon those claiming the benefit of this principle -- in this case the defendants Price. Hughes v. Fields, 168 N.C. 520, 84 S.E. 804; Lumber Co. v. Trading Co., 163 N.C. 314, 79 S.E. 627; Cox v. Wall, 132 N.C. 730, 44 S.E. 635.

Perkins v. Langdon, 237 N.C. 159; 74 S.E.2d 634 (1953):

• Actual possession is treated as the equivalent of notice to the purchaser and as a substitute for registration. Webber v. Taylor, 55 N.C. 9; Edwards v. Thompson, 71 N.C. 177; Tankard v. Tankard, 79 N.C. 54; Heyer v. Beatty, 83 N.C. 285; Bost v. Setzer, 87 N.C. 187; Johnson v. Hauser, 88 N.C. 388; Staton v. Davenport, 95 N.C. 11; Mayo v. Leggett, 96 N.C. 237, 1 S.E. 622. See also Allen v. Bolen, 114 N.C. 560, 18 S.E. 964; 51 C.J.S., Landlord and Tenant, Sec. 258; Raisin v. Shoemaker, supra; Eckman v. Beihl, 116 N.J. 308, 184 A. 430; Huddleston v. Ward (Ohio), 68 N.E. 2d 580; 39 Am. Jur., Notice and Notices, Sec. 18; Annotation, 74 A.L.R. 355.

Smith v. Fuller, 152 N.C. 7; 67 S.E. 48 (1910), in which the North Carolina high court [alteration added]:

• Conced[es] the soundness of the principle established by the decided weight of authority, that possession by a person other than the vendor, when such possession is open, notorious and exclusive, puts a purchaser upon inquiry and is notice of every fact which he could have learned by proper inquiry (as held by this Court in Edwards v. Thompson, 71 N.C. 177; Staton v. Davenport, 95 N.C. 11; Tankard v. Tankard, 79 N.C. 54; ibid., 84 N.C. 286; Bost v. Setzer, 87 N.C. 187; Johnson v. Hauser, 88 N.C. 388; Mfg. Co. v. Hendricks, 106 N.C. 485, 11 S.E. 568; Patterson v. Mills, 121 N.C. 258, 28 S.E. 368), [...]

Tankard v. Tankard, 79 N.C. 54 (1878):

• Open, notorious, and exclusive possession puts a purchaser upon inquiry, and is notice of every fact which he could have learned by inquiry.

For more on the bona fide purchaser doctrine in other states, see Bona Fide Purchaser Doctrine, Possession Of Property By Occupants Other Than The Vendor & The Duty To Inquire.

(2) Ibid.