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IN RE: FORECLOSURE OF DEED OF TRUST FROM RALPH O. WEBBER and
wife, NANCY A. WEBBER, RECORDED IN BOOK  169, PAGE  819, CHOWAN
COUNTY PUBLIC REGISTRY
No. COA01-66
(Filed  28 December  2001)
Mortgages-foreclosure-application of proceeds-authority of
trustee
A judgment from superior court and an order from the clerk
of superior court resolving a dispute over a trustee’s
application of the proceeds of a foreclosure sale were vacated
where the trustee paid  $102,587.50 for the removal of the
mortgagors’ personal property and  $9,619.68 in attorney fees.
The payments in dispute fall under N.C.G.S.  §  45-21.31(a) and are
in the sole province of the trustee; neither the clerk nor the
superior court had statutory authority to review the trustee’s
proposed application of the proceeds of the foreclosure sale or
to allow, disallow, or modify the amount of such proposed
payments.    A party wishing to challenge payments made pursuant to
the statute may do so in a separate proceeding against the
trustee for a breach of fiduciary duty once the payments have
been made, and a trustee seeking guidance may institute a
declaratory judgment action.
Appeal  by  mortgagors  and  substitute  trustee  from  judgment
entered 6 October 2000 by Judge G. K. Butterfield in Chowan County
Superior Court.    Heard in the Court of Appeals  16 October  2001.
Trimpi,  Nash  &  Harman,  L.L.P.,  by  John  G.  Trimpi,  for
mortgagor-appellant/appellee Ralph O. Webber.
Pritchett  &  Burch,  PLLC,  by  Lloyd  C.  Smith,  Jr.  and  Lars  P.
Simonsen, for substitute trustee-appellant/appellee William W.
Pritchett, Jr.
Irvine Law Firm, PC, by David J. Irvine, Jr. and Stephanie B.
Irvine, for mortgagor-appellant/appellee Nancy A. Webber.
HUNTER, Judge.
This  case  involves  a  dispute  over  a  trustee’s  proposed
application  of  the  proceeds  of  a  foreclosure  sale.    William  W.
Pritchett, Jr.  (“the trustee”) sought pre-approval from the clerk
of  superior  court  of  certain  costs,  expenses,  and  obligations




associated with the foreclosure sale of certain property.   Ralph O.
Webber  and  his  wife  Nancy  A.  Webber  (together  “the  mortgagors”),
owners  of  the  property  prior  to  the  sale,  raised  objections  to
certain  of  these  proposed  payments  before  the  clerk  of  superior
court.    The clerk of superior court held a hearing and entered an
order,  the  parties  appealed  from  the  clerk’s  order,  and  the
superior  court  addressed  the  merits  of  the  dispute  and  entered
judgment.    We  hold  that  neither  the  clerk  of  superior  court,  nor
the superior court on appeal, had statutory authority to approve,
disapprove,  or  modify  these  proposed  payments,  or  to  rule  on
whether the trustee breached his fiduciary duties, and we therefore
vacate  the  judgment  of  the  superior  court  and  the  order  of  the
clerk of superior court.
We  begin  with  a  brief  synopsis  of  the  pertinent  facts  and
procedural  history.    On  11  March  1988,  the  mortgagors  executed  a
deed of trust upon a parcel of land located in Chowan County, North
Carolina, in favor of The Federal Land Bank of Columbia.   The deed
of  trust  was  subsequently  assigned  to  AgFirst  Farm  Credit  Bank
(“the mortgagee”).   At some point in time, the mortgagors defaulted
on  the  promissary  note  secured  by  the  deed  of  trust,  thereby
triggering a right to foreclose on the part of the mortgagee.    In
September  of                                                                 1998,  Mr.  Pritchett,  a  licensed  attorney  in  North
Carolina,  was  appointed  as  the  substitute  trustee.    Prior  to  the
final  foreclosure  sale,  which  occurred  on                                2  June                                                    1999,  Perley
Andrew Thomas contacted the trustee and conditioned his willingness
to  bid  upon  the  trustee’s  assurance  that  the  trustee  would  be
responsible  for  removing  Mr.  Webber  and  his  personalty  from  the




property if Mr. Thomas became the high bidder.   The trustee agreed
to this condition and, after numerous upset bids, Mr. Thomas became
the high bidder.
The property was conveyed to Mr. Thomas on  2 September  1999.
At  that  time  Mr.  Webber  still  had  not  removed  himself  or  his
personalty  from  the  property.     Mr.  Webber  ultimately  removed
himself  from  the  property  but  left  a  significant  amount  of
personalty   on   the   premises,   including   horses,   dogs,   cats,
inoperable vehicles, over 200 scrap tires, batteries, barrels, oil
tanks,  lumber,  cans  of  paint,  furnishings,  books,  and  clothing.
The  trustee  hired  Thurman  Price,  a  private  contractor,  to  remove
Mr. Webber’s personalty.   Mr. Price removed the personalty over the
next  three  weeks,  employing  between  ten  and  fifteen  workers,  a
front-end loader, an excavator, and a bulldozer.   Mr. Price billed
the trustee for 526 hours of labor and the use of the machinery for
a  total  of  $102,587.50.    Mr.  Price  also  removed  and  temporarily
stored  twenty-nine  horses,  and  charged                                   $33,860.00  for  storing,
feeding and care for the horses.
In October of  1999, the trustee made an  “interim payment” of
$50,000.00  to  Mr.  Price.    Later  that  month,  prior  to  making  any
other payments from the proceeds of the sale, the trustee filed a
proposed  “Final  Report  and  Account  of  Foreclosure  Sale,”  seeking
pre-approval  by  the  clerk  of  superior  court  of  the  payments  he
intended  to  make,  including:                                              $102,587.50  for  the  removal  of  Mr.
Webber’s personalty from the property by Mr. Price; approximately
$8,000.00 for the care of approximately thirty horses removed from
the  property;  and                                                          $12,000.00  in  legal  fees.    The  clerk  held  a




hearing  on  the  matter,  and  entered  an  order  on  24  November  1999
approving all expenses except  (1) the attorney’s fees, which were
reduced  to                                                                   $9,000.00,  and    (2)  the  fees  for  the  removal  of  Mr.
Webber’s  personalty,  which  were  disallowed.     The  trustee,  Mr.
Webber,  and  Mrs.  Webber  appealed  from  this  order  to  the  superior
court.
Following  a  hearing  on                                                     14  March          2000,  the  superior  court
entered  an  order  containing  findings  of  fact  and  conclusions  of
law, including:   that the court had jurisdiction to hear the appeal
and to conduct a hearing de novo on the merits; that the clerk did
not  exceed  his  authority  in  approving  certain  expenses  and
disallowing others; that the trustee did not breach his fiduciary
duty  by  promising  Mr.  Thomas  that  he  would  remove  Mr.  Webber  and
his personalty from the property, or by hiring Mr. Price to remove
the personalty; that the expenses of $102,587.50 for removal of the
personalty and $33,860.00 for storage and care of the horses should
be approved; and that the attorney’s fees should be increased from
$9,000.00  to  $9,619.68.    From  this  order,  the  mortgagors  and  the
trustee appeal.
The proper procedure for the application of the proceeds of a
foreclosure  sale  is  set  forth  in  Chapter                                45,  Article       2A  of  our
General  Statutes  and  is  divided  into  two  stages.    At  the  first
stage,  pursuant  to  subsection  (a)  of  N.C.  Gen.  Stat.  §  45-21.31,
the  proceeds  “shall  be  applied  by  the  person  making  the  sale”  to
satisfy certain costs, expenses, and other obligations.   N.C. Gen.
Stat.  §  45-21.31(a)  (1999).    During this stage:                          (1) the proceeds
of the sale are first applied to any  “[c]osts and expenses of the




sale,  including  the  trustee’s  commission  .  .  .  and  a  reasonable
auctioneer’s  fee”;  (2)  the  proceeds  are  next  applied  to  certain
taxes  on  the  property  which  are  due  and  unpaid;  (3)  the  proceeds
are  next  applied  to  certain  special  assessments  against  the
property  sold;  and                                                          (4)  the  proceeds  are  next  applied  to                “[t]he
obligation  secured  by  the  mortgage,  deed  of  trust  or  conditional
sale contract” (including any attorney’s fees provided for by such
instrument).   Id.; see In re Foreclosure of Ferrell Brothers Farms,
118 N.C. App.  458,  460-61,  455 S.E.2d  676,  677-78  (1995).
At the second stage, pursuant to subsection  (b) of N.C. Gen.
Stat. § 45-21.31, “[a]ny surplus remaining after the application of
the proceeds of the sale as set out in subsection (a) shall be paid
to the person or persons entitled thereto, if the person who made
the  sale  knows  who  is  entitled  thereto.”    N.C.  Gen.  Stat.  §  45-
21.31(b).   If the person who made the sale is in doubt as to who is
entitled to the surplus, or if there are adverse claims asserted as
to  the  surplus,                                                             “the  surplus  shall  be  paid  to  the  clerk  of  the
superior court,” which payment discharges the person who made the
sale  from  liability.     N.C.  Gen.  Stat.                                  §                                                         45-21.31(b)  and   (c).
Finally, after the sale is completed and all payments are made, the
trustee  is  required  to  file  a  final  report  and  account  with  the
clerk of the superior court of the county where the sale is held,
and  the  clerk  is  required  to  “audit  the  account  and  record  it.”
N.C.  Gen.  Stat.  §  45-21.33(b)  (1999).    In  conducting  this  audit,
the  clerk  is  only  authorized  to  determine  whether  the  entries  in
the  report  reflect  the  actual  receipts  and  disbursements  made  by
the trustee.   Ferrell Brothers, 118 N.C. App. at 461, 455 S.E.2d at




678.
This Court has explained that the application of the proceeds
of the sale, made pursuant to subsection  (a) of N.C. Gen. Stat.  §
45-21.31, are  “within the sole province of the trustee,” and that
the trustee is not required to receive pre-approval from the clerk
of superior court, or the superior court, regarding the application
of  the  proceeds.    Id.    Moreover,  we  have  held  that,  within  the
context of a foreclosure proceeding pursuant to Chapter 45, Article
2A,  the  legislature  has  not  provided  any  means  for  a  party  to
contest payments made by a trustee pursuant to subsection (a), and
that  disputes  regarding  such  payments  are  not  issues  properly
before the clerk of superior court or the superior court as part of
a foreclosure proceeding.    Id. at  460,  455 S.E.2d at  677  (holding
that  a  junior  mortgagee’s  challenge  as  to  the  amount  of  the
trustee’s   commission   and   attorney’s   fees,   made   pursuant   to
subsection                                                                      (a)  of  N.C.  Gen.  Stat.   §   45-21.31,  was  not  properly
before superior court in foreclosure proceeding).    By contrast, a
dispute as to who is entitled to the surplus of the proceeds, after
the  proceeds  have  been  applied  as  required  by  subsection  (a)  of
N.C.  Gen.  Stat.  §  45-21.31,  is  an  issue  that  may  be  heard  by  the
clerk of superior court or the superior court within the context of
a  foreclosure  proceeding.    See  N.C.  Gen.  Stat.  §  45-21.32  (1999)
(any  person  who  claims  that  they  are  entitled  to  some  portion  of
the surplus may institute a special proceeding before the clerk of
the  superior  court  and,  if  any  answer  is  filed  raising  issues  of
fact  as  to  the  ownership  of  the  surplus,  the  proceeding  is
transferred to the superior court for trial).




In the present case, there are two categories of payments in
dispute:                                                                      (1) the trustee’s attorney’s fees of $9,619.68, resulting
from  time  spent  on  the  foreclosure  sale  by  the  trustee  and  the
attorneys  in  his  firm;  and  (2)  the  expenses  charged  by  Mr.  Price
for the removal of Mr. Webber’s personalty from the property, and
for  the  care  and  storage  of  Mr.  Webber’s  horses.    Both  of  these
categories of payments fall within the costs, expenses, and other
obligations listed in subsection (a) of N.C. Gen. Stat. § 45-21.31.
In  Merrit  v.  Edwards  Ridge,  323  N.C.  330,  372  S.E.2d  559  (1988),
our Supreme Court described the nature of the costs, expenses, and
other  obligations  listed  in  items  (1),  (2)  and  (3)  of  subsection
(a) of N.C. Gen. Stat.  §  45-21.31:
Payment of the costs and expenses required by
N.C.G.S.  §  45-21.31(a)  is  not  the  obligation
of  the  purchase  money  debtor  whose  deed  of
trust   is   being   foreclosed.                                              Nor   is   it,
strictly speaking, the obligation of the buyer
at  the  foreclosure  sale.                                                   Instead,  these
statutory  costs  and  expenses,  including  the
trustee’s  commission,  are  simply  obligations
arising  from  the  foreclosure  sale  which  must
be paid by the trustee before the remainder of
the proceeds may be distributed.
Id.  at  336,  372  S.E.2d  at  563.    Because  the  payments  in  dispute
here fall under subsection (a), they are “within the sole province
of  the  trustee.”    Ferrell  Brothers,                                      118  N.C.  App.  at                                         461,   455
S.E.2d at  678.    Moreover, neither the clerk of superior court nor
the  superior  court  had  statutory  authority  under  Chapter               45,
Article  2A,  to  review  the  trustee’s  proposed  application  of  the
proceeds of the foreclosure sale, or to allow, disallow, or modify
the  amount  of  such  proposed  payments,  or  to  rule  on  whether  the
trustee had breached his fiduciary duties.




We  suggest  that  the  proper  procedure,  as  contemplated  by
Chapter  45, Article  2A, was for the trustee to have:                         (1) made all
payments pursuant to subsection  (a) of N.C. Gen. Stat.  §  45-21.31
as he deemed proper in his discretion; (2) either paid the surplus
to the persons entitled thereto, or paid the surplus to the clerk
if there were any dispute as to who was entitled thereto, pursuant
to N.C. Gen. Stat.  § 45-21.31(b); and (3) filed a final report and
account with the clerk pursuant to N.C. Gen. Stat.  § 45-21.33.   We
note  that  a  party  wishing  to  challenge  payments  made  pursuant  to
N.C.  Gen.  Stat.  §  45-21.31(a)  may  do  so  in  a  separate  proceeding
against  the  trustee  for  a  breach  of  fiduciary  duty  once  such
payments  have  been  made.    See  Sloop  v.  London,  27  N.C.  App.  516,
219 S.E.2d 502 (1975) (action for wrongful foreclosure alleging, in
part,  breach  of  fiduciary  duty  by  trustee).    We  also  note  that,
presumably, a trustee seeking guidance as to the application of the
proceeds of a foreclosure sale may institute a declaratory judgment
action, provided the prerequisites for such an action (including an
actual  controversy  between  the  parties)  are  satisfied.                   The
judgment  of  the  superior  court,  and  the  order  of  the  clerk  of
superior court, are vacated.
Vacated.
Judges GREENE and THOMAS concur.

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