Non-Judicial Foreclosure in North Carolina: The Limited Scope of the Hearing Before the Clerk of Court in Condominium or Homeowner Association Foreclosures

Contrary to popular belief, most property owners fulfill their financial obligations to their association. As a result, the number of actual association foreclosures is very, very small. Of that percentage, almost nobody wakes up in the morning and decides to stop paying a mortgage or condominium or homeowner association dues. The facts of life, however, intervene. Taking care of loved ones who are sick, loss of a job, or other life-changing experiences happen more than one would expect. When a person is dealing with these difficulties and trying to make mortgage payments and pay homeowners association dues, it is an easy decision what to pay first and what to pay last. As a result, normal everyday people may find themselves facing a foreclosure action filed by their homeowners association or condominium.

Foreclosure is typically a last resort for the condominium or homeowners association. In every foreclosure, the association has exhausted all other avenues to persuade the homeowner to comply with the covenants agreed to when the homeowner bought in the community. The obligation to share in the costs and the benefits of the community should be borne by all homeowners in the homeowners association, not just by some. Where a homeowner is unable or unwilling to abide by the covenants agreed to, foreclosure is often the only remedy left to the association.

In North Carolina, there are two varieties of foreclosure—judicial and non-judicial. Judicial foreclosure is basically just a lawsuit that seeks, as the remedy, to foreclose. It is generally much more expensive and takes much longer than a non-judicial foreclosure. Judicial foreclosure is the exception, rather than the norm. Most foreclosures in North Carolina are non-judicial. One reason that non-judicial foreclosure is less expensive is because the foreclosure hearing is held before the Clerk of Court, generally in the county in which the property is located. The Clerk will determine the sufficiency of the evidence presented and whether the foreclosure will be permitted to proceed.

Where the homeowner association is the party seeking to foreclose, there are only a few things that the Clerk must find in order to authorize the foreclosure: (1) notice to those entitled to notice, (2) a valid debt, and (3) authority in the homeowner’s association’s governing documents to foreclose. Because the hearing is limited to these findings, it usually is much faster and cost-effective for a condominium or homeowner association to use the non-judicial route to foreclose.

Because the hearing is limited in nature to the specific issues above, there are certain issues that the Clerk (although he or she may listen politely) will usually consider to be irrelevant to the required findings. Here are four common arguments that fall into this category:

1. My Association doesn’t trim the bushes in front of my unit, so I’m not going to pay.

The problem with this argument is that the foreclosure action and what the homeowner’s association is or is not doing are two completely unrelated things. The Clerk cannot consider equitable arguments about what is fair or what should be done. Instead, because of the limited scope of the non-judicial foreclosure, an argument like this does not impact any of the required findings and would be irrelevant.

2. The Association doesn’t treat me the same as everyone else. / Why am I the one being foreclosed on when my neighbor is worse than me?

The problem with this argument is that the Clerk does not have the ability to act as a referee for every grievance of every homeowner in the association. The only matters the Clerk can or will consider are those pertaining to the individual before the Clerk in the hearing. Another problem with this argument is lack of knowledge of all facts. Association records about who may be in foreclosure or in collections with the attorney’s office are confidential. It may be that the neighbor is also facing a foreclosure, but that is a fact that the association is required by law not to share with other homeowners.

3. I don’t agree with the way my Association is being run, so I’m not going to pay.

I call this the conscientious objector of the homeowner’s association. Like the first scenario, this person is attempting to connect the duty to pay assessments with the association’s duty to run the association. Unfortunately, they are not connected. As with the first couple of scenarios, the Clerk is constrained to limit his or her findings to those matters within the scope of the non-judicial foreclosure hearing. Whether the homeowner’s association is a well-oiled machine or keeps the grass trimmed to exactly the two inch recommended growing height are not going to have any impact on a homeowner’s duty to pay assessments.

4. I think they got the amount wrong/I owe $975, not $1,155

I save the most un-common sense scenario for last. In the real world that we all live in, whether the amount of money that Jimmy Lipper owes to Marge is really $975 instead of $1,155 would be relevant to everyone involved. In a non-judicial foreclosure in North Carolina, the courts have interpreted the requirement that there be a “valid debt” to mean only that there is a debt—not the precise amount of that debt. Obviously, if there is a discrepancy, the homeowner’s association should be made aware. But, for purposes of the required findings in a non-judicial foreclosure action in North Carolina, the exact amount is far less relevant than the fact that there is a valid debt.

Because non-judicial foreclosures in North Carolina brought by homeowner’s associations or condominiums are limited in scope, Clerks will only consider whether there has been proper notice, whether there is a valid debt, and whether there is authority to foreclose. Other arguments, while entertaining, will generally not be relevant to the ultimate decision whether to permit a foreclosure.