Stone et al v. Gateway Bank et al

UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF NORTH CAROLINA
NEW BERN DIVISION
IN RE:
HARRY RONALD STONE and MARY
WARREN STONE,
DEBTORS.
HARRY RONALD STONE and MARY
WARREN STONE,
Plaintiffs
v.
GATEWAY BANK & TRUST COMPANY;
FIRST CITIZENS BANK & TRUST COMPANY;
FIRST FARM CREDIT; FIRST VICTORIA
NATIONAL BANK; PLANTATION FEDERAL;
REGIONS BANK; SUNTRUST BANK; WELLS
FARGO BANK; FIRST BANK; BRANCH
BANKING & TRUST COMPANY; BANK OF
AMERICA; MEGA FORCE STAFFING GROUP,
INC. and JOHNNY EDGE,
Defendants
CASE NO.
10-05985-8-JRL
CHAPTER 11
ADVERSARY
PROCEEDING NO.
11-00006-8-JRL
ORDER
This matter came before the court on Harry Ronald Stone and Mary Warren Stone’s
(“plaintiffs”) motion for summary judgment. Gateway Bank & Trust Company (“Gateway
SO ORDERED.
SIGNED this 15 day of August, 2011.
________________________________________
J. Rich Leonard
United States Bankruptcy Judge
____________________________________________________________
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1Wells Fargo Bank and Gateway Bank & Trust Company may also be creditors of Mrs.
Stone.
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Bank”) filed a response to plaintiffs’ motion and also filed a cross motion for summary judgment
against plaintiffs. Regions Bank filed a response to plaintiffs’ motion and joined in Gateway
Bank’s response to plaintiffs’ motion. First Bank filed a response to plaintiffs’ motion
incorporating Gateway Bank’s cross motion for summary judgment. Wells Fargo Bank filed a
response to plaintiffs’ motion and joined in support of Gateway Bank’s response and cross
motion. Branch Banking & Trust Company (“BB&T”) filed a motion to join in Gateway Bank’s
response to plaintiffs’ motion. Plaintiffs filed a response to Gateway Bank’s cross motion. A
hearing was held on July 14, 2011, in Raleigh, North Carolina.
Plaintiffs filed for relief under chapter 11 of the Bankruptcy Code on July 29, 2010.
Plaintiffs instituted this adversary proceeding on January 14, 2011, seeking reformation of a
deed to add Mary Warren Stone (“Mrs. Stone”) as an additional grantee of real property located
in Carteret County, Beaufort, North Carolina. The deed currently states that H. Ronald Stone is
the sole grantee. Plaintiffs named the creditors of Harry Ronald Stone (“Mr. Stone”), whose
claims in the chapter 11case would be affected if this relief is granted, as defendants. 1 The
parties each moved for summary judgment on the issues presented to the court.
BACKGROUND
On February 29, 1996, Taylor Creek Associates, Inc. conveyed real property in Beaufort,
North Carolina (“Beaufort property”) to H. Ronald Stone by general warranty deed (“the deed”).
The deed was properly recorded in Carteret County, North Carolina. Mary W. Stone was not
listed as a grantee nor mentioned by name anywhere in the deed. Plaintiffs allege by affidavit
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2 Mrs. Stone’s name appears on the construction contract for the home built on the
Beaufort property, original engineering and architectural drawings for the home, insurance for
the property, CAMA permit to build on the property, FEMA elevation certificate for the
property, certificate of occupancy for the home, application to build the home, and certificate
holder of the plumber’s liability insurance.
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the following: The Beaufort property was intended to be conveyed to plaintiffs as husband and
wife to hold as tenants by the entirety. Plaintiffs never actually saw the deed prior to filing for
relief under chapter 11, and always assumed the Beaufort property was titled in plaintiffs' names.
After filing for relief under chapter 11, plaintiffs discovered the Beaufort property was titled
only in Mr. Stone's name. Mrs. Stone is an obligor on the promissory note, secured by a deed of
trust that grants a security interest in the Beaufort property to BB&T. Mrs. Stone’s name also
appears on numerous other documents related to the Beaufort property. 2 The grantor of the
Beaufort property alleges by affidavit that his company intended to convey the property to
plaintiffs.
In conflict with plaintiffs’ affidavit, Wells Fargo Bank and Gateway Bank, creditors of
plaintiffs and named defendants, allege that plaintiffs made affirmative statements to Wells
Fargo Bank and Gateway Bank that the Beaufort property was titled only in Mr. Stone’s name.
There is uncontradicted evidence that plaintiffs made five joint personal financial statements
(“statements”) all of which indicate that Mr. Stone is the sole owner of the Beaufort property.
Specifically, Wells Fargo Bank obtained statements from plaintiffs dated September 30, 2004
and October 7, 2008. Gateway Bank obtained statements from plaintiffs dated July 18, 2005,
April 25, 2006, and June 18, 2007. Each statement contained language that indicated the
information contained in the statements would be relied on by creditors in deciding whether to
grant or continue credit to plaintiffs. There was also language that indicated plaintiffs knew the
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importance of telling the truth in making the statements. On the September 30, 2004 statement,
Mr. Stone was asked to list and describe all real property he owned and his percentage of
ownership. Mr. Stone stated that he owned 100% of the Beaufort property. Mr. Stone also
specifically listed other property he owned less than 100%. On the other statements Mr. Stone
listed his “wholly owned property” and “partially owned property.” Mr. Stone always listed the
Beaufort property as his “wholly owned property.” The July 18, 2005 statement was signed by
both Plaintiffs. The October 7, 2008 statement was signed by neither Mr. or Mrs. Stone. The
remaining statements were signed only by Mr. Stone.
Plaintiffs present evidence that the statements do not accurately reflect Mr. Stone’s belief
in the ownership of the Beaufort property. Mr. Stone indicated, on the statements, that three
separate tracts of land, in Tarboro, Wilson, and Fayetteville, North Carolina, were owned
entirely by Mr. Stone. The deeds for these tracts indicate the tracts are owned jointly by
plaintiffs.
There is also uncontradicted evidence that the Carteret County Tax Department has
property tax bills on file corresponding to the Beaufort property. Each of the property tax bills
are public records and list Mr. Stone as the sole owner of the Beaufort property. The tax records
reflect tax payments made on the Beaufort property from January 5, 2001 to January 6, 2011.
STANDARD OF REVIEW
Pursuant to Federal Rule of Civil Procedure 56(c), made applicable in bankruptcy by
Bankruptcy Rule 7056, summary judgment is proper “if the pleadings, depositions, answers to
interrogatories and admissions on file, together with the affidavits, if any, show that there is no
genuine issue as to any material fact and that the moving party is entitled to a judgment as a
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matter of law.” The “plain language of Rule 56(c) mandates the entry of summary judgment,
after adequate time for discovery and upon motion, against a party who fails to make a showing
sufficient to establish the existence of an element essential to that party’s case, and on which that
party will bear the burden of proof at trial.” Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986).
In making this determination, conflicts are resolved by viewing all facts and all reasonable
inferences in the light most favorable to the nonmoving party. United States v. Diebold, Inc.,
369 U.S. 654, 655 (1962).
DISCUSSION
Plaintiffs seek to add Mrs. Stone as additional grantee by filing an affidavit with the
register of deeds office. Plaintiffs argue the failure to include Mrs. Stone’s name as an additional
grantee of the Beaufort property was a typographical error. Pursuant to North Carolina General
Statute § 47-36.1 (2010), “notice of typographical or other minor error in a deed or other
instrument recorded with the register of deeds may be given by recording an affidavit.” In Green
v. Crane, 96 N.C. App. 654, 658, 386 S.E.2d 757, 760 (1990), the court stated that the addition
of a legal description of land was not “the correction of an obvious typographical or clerical
error.” In this case, like Green, the addition of a grantee, that was not named in the original
deed, is not the type of error that can be corrected through submission of an affidavit pursuant to
North Carolina General Statute § 47-36.1. Therefore, plaintiffs cannot correct this omission by
filing an affidavit with the register of deeds. Counsel for plaintiffs conceded this point at oral
argument.
Plaintiffs also seek reformation of the deed to include Mrs. Stone as an additional
grantee. Plaintiffs allege that Mrs. Stone’s name was left out of the deed based on mutual
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mistake. Reformation is an equitable remedy available to the parties “when, because of the
mutual mistake of the parties, the agreement expressed in a written instrument differs from the
actual agreement made by the parties.” Light v. Equitable Life Assur. Soc. of the U.S., 56 N.C.
App. 26, 286 S.E.2d 868 (1982). Based on the evidence presented, the court finds as a matter of
law that even if plaintiffs’ evidence presents a genuine issue of material fact as to their intent,
this action is barred by the applicable statute of limitations period.
Defendants argue that plaintiffs cannot reform the deed since the applicable statute of
limitations period has run. In North Carolina, an aggrieved party seeking reformation of a deed
based on mutual mistake has three years to file its cause of action. N.C. Gen. Stat. § 1-52(9)
(2010). Pursuant to North Carolina General Statute § 1-52(9), “relief on the ground of fraud or
mistake . . . shall not be deemed to have accrued until the discovery by the aggrieved party of the
facts constituting the fraud or mistake.” Id. In Moore v. Fidelity & Cas. Co. of N.Y., 207 N.C.
433, 437, 177 S.E. 406, 408 (1934), the court stated, “actual discovery of the fraud or mistake is
not always conclusive. . . . [T]he cause of action shall be deemed to have accrued from the time
the fraud [or mutual mistake] was known or should have been discovered in the exercise of
ordinary diligence.” Whether a mistake in a deed should have been discovered through “the
exercise of reasonable diligence depends upon the circumstances of each case and is ordinarily a
question of fact for the jury, particularly when the evidence is inconclusive or conflicting.”
Grubb Properties, Inc. v. Simms Inv. Co., 101 N.C. App. 498, 501, 400 S.E.2d 85, 87 (1991).
However, “where the evidence is clear and shows without conflict that the claimant had both the
capacity and opportunity to discover the mistake or discrepancy but failed to do so the absence
of reasonable diligence is established as a matter of law.” Id. In Peacock v. Barnes, 142 N.C.
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215, 218, 55 S.E. 99, 100 (1906), the court explained the importance of reasonable diligence by
stating,
A man should not be allowed to close his eyes to facts readily observable by ordinary
attention and maintain for its own advantage the position of ignorance. Such a
principle would enable a careless man, and by reason of his carelessness to extend
his right to recover for an indefinite length of time, and thus defeat the very purpose
the statute was designed and framed to accomplish. In such case a man's failure to
note facts of this character should be imputed to him for knowledge, and in the
absence of any active or continued effort to conceal a fraud or mistake, or some
essential facts embraced in the inquiry, we think the correct interpretation of the
statute should be that the cause of action will be deemed to have accrued from the
time when the fraud or mistake was known or should have been discovered in the
exercise of ordinary diligence.
Under North Carolina law, “it is a landowner's responsibility to exercise reasonable diligence in
informing himself of the condition and extent of his property, and . . . he is therefore chargeable
with knowledge of those facts that reasonable diligence would reveal.” Fulcher v. United States,
696 F.2d 1073, 1077 (4th Cir. 1982) (discussing Peacock v. Barnes, 142 N.C. 215, 55 S.E. 99
(1906); Ewbank v. Lyman, 170 N.C. 505, 87 S.E. 348 (1915); and Latham v. Latham, 184 N.C.
55, 113 S.E. 623 (1922)).
Here, plaintiffs argue the statute of limitations for reforming the deed did not begin to toll
until after they filed their petition for relief under chapter 11. Defendants argue that plaintiffs
failed to use reasonable diligence to discover the mistake prior to filing for relief. Defendants
also contend that plaintiffs had actual knowledge of the mistake based on statements made by
plaintiffs to Wells Fargo Bank and Gateway Bank, and the Beaufort property’s public tax
records. In Grubb, the plaintiff sought reformation of a deed to change the deed’s land
description to include an additional 1.283 acre tract. Grubb Properties, Inc., 101 N.C. App. at
501-02, 400 S.E.2d at 87-88. The plaintiff originally purchased the real property, an apartment
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complex, with the intent to convert the complex into commercial condominiums. Id. In
preparing for the conversion, the plaintiff had a survey performed on the land. Id. The court
stated that the plaintiff had both the capacity and opportunity to discover the mistake by
comparing the deed’s land description to the survey report. Id. The court concluded that the
plaintiff, in preparing to sell the condominiums to the public, “had the positive duty to exercise
reasonable care in describing the converted land, and its failure to take the simple steps that
would have enabled it to ascertain that the 1.283 acre parcel had not been conveyed to it cannot
be equated with reasonable care.” Id. at 502, 400 S.E.2d at 88.
In this case, plaintiffs had both the opportunity and the capacity to discover the mistake,
and their failure to do so establishes the absence of ordinary diligence. There is uncontradicted
evidence that plaintiffs made five statements over the years to acquire lines of credit or extend
existing lines of credit. On each statement plaintiffs listed the Beaufort property as the sole
property of Mr. Stone. He never listed the Beaufort property as “partially owned” or indicated a
percentage of ownership less than 100%. Similar to the plaintiff in Grubb, plaintiffs had a
positive duty to ascertain who held title to the Beaufort property since they used the Beaufort
property to acquire a line of credit. Plaintiffs knew it was important to be truthful in their
financial disclosures because each financial statement contained language indicating creditors
were relying on their statements and it was important to tell the truth. Like the plaintiff in
Grubb, plaintiffs could have discovered the mistake by reading the deed since the deed was
properly recorded in Carteret County. The language of the deed clearly and unambiguously
states that H. Ronald Stone is the sole grantee of the Beaufort property. A casual reading of the
deed would have put plaintiffs on notice of the mistake in the deed. In addition, the public tax
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records show that the Beaufort property is owned solely by Mr. Stone. Tax payments were made
on the Beaufort property as early as 2001, therefore plaintiffs had constructive notice of their tax
listing. Plaintiffs had the opportunity to discover the mistake.
Plaintiffs also had the capacity to discover the mistake in the deed. In Moore, the
plaintiff brought an action to reform a clause in certain depository bonds based on mutual
mistake. Moore, 207 N.C. at 436, 177 S.E. at 407. The court stated that the action was barred
by the statute of limitations when the plaintiff had been a student, and was also “an able and
experienced business man . . . therefore, even a casual reading of the instruments at the time they
were delivered would have disclosed” the mutual mistake. Id. at 437, 117 S.E. at 408. Here, the
statements show that Mr. Stone owned several pieces of real property in North Carolina. On the
statements plaintiffs frequently distinguished between real property that Mr. Stone held as sole
owner from the property that he held jointly. Similar to the experienced businessman in Moore,
Mr. Stone, as an experienced businessman and landowner, had the capacity to understand how
he held his property and how to read a deed.
Plaintiffs contend that Mr. Stone believed listing himself as “sole owner” on the
statements meant that his wife was also an owner because his wife owned everything that he
owned. In North Carolina, “[a] deed to husband and wife, nothing else appearing, vests the title
in them as tenants by entirety.” Honeycutt v. Citizens Nat. Bank in Gastonia, 242 N.C. 734, 741,
89 S.E.2d 598, 604 (1955). Real property owned by a husband and wife as tenants by the
entirety “may not be held liable for the individual debts of either husband or wife. However, it is
liable for the obligations of both.” North Carolina Nat. Bank v. Corbett, 271 N.C. 444, 447, 156
S.E.2d 835, 837 (1967). Listing the Beaufort property as the sole property of Mr. Stone
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benefitted plaintiffs because creditors are less willing to extend credit to an individual who holds
property as tenants by the entirety since that property cannot be charged with individual debts of
a spouse. It would be inequitable to allow plaintiffs to benefit from listing the property as the
sole property of Mr. Stone but then to also allow them to benefit from the protection offered by
holding real property as tenants by the entirety. Mr. Stone’s belief that his wife owned all the
real property he owned does not negate the fact that plaintiffs had both the opportunity and
capacity to ascertain the true ownership status of the Beaufort property in the 14 years prior to
filing for relief under chapter 11. Their failure to do so establishes the absence of reasonable
diligence as a matter of law. Therefore, Mr. Stone’s belief that his wife owned everything that
he owned is irrelevant.
In this case, the absence of reasonable diligence has been established as a matter of law.
The deed was conveyed to H. Ronald Stone on February 26, 1996. The financial statements
were dated September 30, 2004, July 18, 2005, April 25, 2006, June 18, 2007, and October 7,
2008. This adversary proceeding was filed on January 14, 2011, more than 14 years from the
date of conveyance and more than three years from the date of all but the last financial statement.
Tax payments were made on the Beaufort property as early as January 2001. Plaintiffs had three
years to file their action to reform the deed from the time the mistake was known or should have
been discovered in the exercise of ordinary diligence. Normally the question of whether the
parties should have discovered the mistake is a question of fact unless there is uncontradicted
evidence to establish the absence of ordinary diligence. The information contained in the
statements and tax records is undisputed. In light of this evidence, the courts finds that plaintiffs
should have discovered the mistake through the exercise of ordinary diligence prior to filing their
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petition for relief. Plaintiffs’ reformation claim is barred by the statute of limitations.
Defendants also argue Plaintiffs are not entitled to relief based on section 544 of the
Bankruptcy Code. In light of the reformation action being barred by the statute of limitations,
the court does not reach the merits of defendants’ additional claim.
Based on the foregoing, plaintiffs’ motion for summary judgment is DENIED and
defendants’ motion for summary judgment is GRANTED. Because this order conclusively
determines the only issue in the case, the grant of summary judgment runs in favor of all
defendants. The clerk is directed to enter a final judgment that the plaintiffs are entitled to no
relief.
END OF DOCUMENT
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