WAFF BROS, INC.
v.
BANK OF NORTH CAROLINA, N.A., et al.
No. 63.
Supreme Court of North Carolina.
January 29, 1976.*276 White, Hall, Mullen & Brumsey by Gerald F. White and William Brumsey, III, Elizabeth City, for plaintiff.
Ellis, Hooper, Warlick, Waters & Morgan by Harold L. Waters and John D. Warlick, Jr., Jacksonville, for defendant Bank of North Carolina.
LAKE, Justice.
The sole question before us is whether Judge Lanier erred in concluding and ordering that the temporary restraining order, restraining the sale under execution of the land in question, should be vacated so as to permit the defendant sheriff to sell such property prior to the hearing of this matter on its merits.
*277 In determining that question, we are not bound by the findings of fact, or lack of such findings, by either of the lower courts, but may review the evidence and make our own findings of fact. Setzer v. Annas, 286 N.C. 534, 212 S.E.2d 154; Board of Elders v. Jones, 273 N.C. 174, 159 S.E.2d 545, 37 A.L.R. 3d 262; Conference v. Creech and Teasley v. Creech and Miles, 256 N.C. 128, 123 S.E.2d 619. Upon the final hearing of the matter, neither our findings of fact upon this appeal nor the findings or conclusions of the Court of Appeals, or of the trial judge at the hearing upon the order to show cause why the restraining order should not be continued, are to be considered by the Superior Court. Board of Elders v. Jones, supra; Strong, N.C.Index 2d, Injunctions, § 12. All such findings of fact relate solely to the question of whether a preliminary injunction should be issued staying the sale of the property until the final determination of the merits of the matter. For that purpose we have reviewed the record and determine the facts to be as set forth above in our statement of the facts.
As this Court, speaking through Justice Clifton Moore, said in Conference v. Creech and Teasley v. Creech and Miles, supra, "Ordinarily a temporary injunction [or a preliminary injunction] will be granted pending trial on the merits, (1) if there is probable cause for supposing that plaintiff will be able to sustain his primary equity, and (2) if there is reasonable apprehension of irreparable loss unless injunctive relief be granted, or if in the court's opinion it appears reasonably necessary to protect plaintiff's right until the controversy between him and the defendant can be determined." (Emphasis added.)
The Court of Appeals erred in its conclusion that there has been a "complete failure of a showing by plaintiff that it will be irreparably damaged if injunctive relief is not granted." In its brief in this Court, the appellee bank concedes: "While, as the Court of Appeals stated * * * a showing by Plaintiff of being irreparably damaged is lacking, during the entire proceeding in the Trial Court, it was understood that the 48 acres tract did not have a fair market value sufficient to equal or exceed the total amount of the Quible and Waff judgments. Also upon any future hearing on the merits Defendant Appellee will not, unless there be substantial change in economic conditions, contend that the fair market value is of such magnitude." The complaint of the plaintiff, considered by the trial court as an affidavit, states: "Plaintiff alleges on information and belief that the sale of said property under execution will not produce adequate sums to pay any appreciable portion of plaintiff's judgment claim of $193,987.62 with interest thereon from November 15, 1970." We, therefore, conclude that there was a sufficient showing of reasonable apprehension of irreparable harm to the plaintiff if the land in question be sold under execution issued on the Quible judgment, and we turn to the question of whether there is probable cause for supposing that the plaintiff will be able to sustain its primary equity.
The plaintiff contends that the land cannot lawfully be sold under the execution issued upon the Quible judgment for the reason that the Quible judgment has been paid and the lien thereof extinguished. Quible obtained his judgment against Vacation Properties, Inc., the judgment establishing that Quible was entitled to recover from Vacation Properties, Inc., $63,182.91 and that a lien therefor, prior to the plaintiff's lien, extended to the land in question. Vacation Properties, Inc., then conveyed the land to Carolina-Albemarle Corporation. Such conveyance was, as a matter of law, subject to such lien, but the record does not show that Carolina-Albemarle Corporation assumed liability for the payment of the Quible judgment. Thus, nothing else appearing, Carolina-Albemarle Corporation did not become personally liable to Quible upon the judgment. Thereafter, Carolina-Albemarle Corporation paid to Quible $20,000 upon the Quible judgment, took from Quible an assignment of the judgment and executed and delivered to Quible its note *278 for the balance due on the judgment, which note it secured by a deed of trust upon other land. Thereby, nothing else appearing, Carolina-Albemarle Corporation became a debtor to Quible upon its note, but not upon the judgment. Under these circumstances, nothing else appearing, the Quible judgment cannot be deemed to have been paid or the lien thereof to have been merged into the fee simple estate owned by Carolina-Albemarle Corporation in the land here in question.
The owner of a judgment against another may assign to a third person such judgment and the lien thereof without impairing the validity of either. Clearly, this is what Quible and Carolina-Albemarle Corporation intended to do. Had Carolina-Albemarle Corporation not been the owner of the land in question and had it been wholly unrelated to Vacation Properties, Inc., the Quible judgment and the lien thereof would, unquestionably, have remained in full force and effect following this transaction and would have been assignable by Carolina-Albemarle Corporation to the defendant bank.
We turn now to the effect, if any, of the fact that Carolina-Albemarle Corporation, at the time it acquired the Quible judgment, was the owner of the fee simple estate in the land in question by virtue of a prior conveyance to it from Vacation Properties, Inc.
As is said in Webster, Real Estate Law In North Carolina, § 365, the lien of the Quible judgment, when acquired by Carolina-Albemarle Corporation, was "in the nature of a statutory mortgage." When the owner of mortgaged land, who is primarily liable for the payment of the debt secured by the mortgage, becomes also the owner of the indebtedness secured by the mortgage, and the security interest incident thereto, the debt is deemed paid and the land is discharged from the lien of the mortgage. Hussey v. Hill, 120 N.C. 312, 26 S.E. 919. In Tiffany on Real Property, 3d Ed., § 1482, it is said:
"While, as above stated, the question of merger vel non is ordinarily to be determined with reference either to the intention or the interest of the party in whom the two interests are vested, there may be circumstances under which neither of these considerations can be given effect. Such is the case when one who is primarily liable for the mortgage debt acquires the debt with the lien incidental thereto, `takes an assignment of the mortgage,' as it is usually expressed. One who is primarily liable for a debt cannot acquire the debt, that is, a claim against himself, and assert that the debt is still outstanding. The same person cannot be debtor and creditor, and the effect of his acquisition of the debt is to render it no longer existent. So when the person whose debt is secured by a mortgage, ordinarily the mortgagor himself, acquires the debt with its incidental lien, the debt being discharged, the mortgage lien is extinguished. And the case is the same when a grantee of the land assumes payment of the mortgage and thereafter acquires the mortgage debt. He being primarily liable for the debt, the debt is discharged."
The rule is not the same, however, where the owner of the mortgaged property is not personally liable for the payment of the mortgage debt. In such case the intention of the parties to the transfer of the indebtedness controls.
In Furniture Co. v. Potter, 188 N.C. 145, 124 S.E. 122, the facts were strikingly similar to those in the case before us. There the holder of a junior mortgage sought to enjoin the foreclosure of a senior mortgage on the ground that it had been extinguished by merger when the assignee of it purchased the equity of redemption in the mortgaged land. Justice Stacy, later Chief Justice, speaking for the Court, said:
"It is undoubtedly the general rule of law that where one who holds a mortgage on real estate becomes the owner of the fee, and the two estates are thus united in the same person, ordinarily the former *279 estate merges in the latter. The equitable or lesser estate is said to be swallowed up, or `drowned out,' by the legal or greater interest. But this rule does not apply where such merger would be inimical to the interests of the owner, as, for example, where it would prevent his setting up the mortgage to defeat an intermediate titlesuch as a subsequent lien or a second mortgage, as in the instant caseunless the parties intended otherwise; and this intention will not be presumed contrary to the apparent interests of the owner. As to whether such was intended by the parties is a question of fact; and the courts will `permit or prevent the application of the doctrine as the same may accord with the intent of the parties and the right and justice of the matter.'" (Citations omitted.)
In Tiffany on Real Property, 3d Ed., §§ 1480 and 1481, it is said:
"The theory on which, upon the acquisition by one person of the mortgaged land and of the mortgage debt with the incidental lien on the land, the debt, and with it the lien, may ordinarily be regarded as extinguished, would seem to be that, under such circumstances, the person owning and controlling the debt can usually have no object in keeping it alive, it being in substance a claim against his own property, and he may consequently be presumed to intend that the debt shall be extinguished, a presumption to which, as tending to the simplification of titles, the courts are ready to give full effect. In accordance with this view are the numerous decisions that the intention of the holder of the two interests is the decisive consideration, and that no merger will take place if there is proof of an intention on his part to the contrary. * * *
"The fact that the mortgage debt with its lien is subsequently assigned by the person who has acquired the two interests has been held to show an intention against merger * * *
"It frequently happens that there is no evidence as to the intention in this regard, and in such a case equity will usually presume that the owner of the two interests intended that they should merge, or the contrary, according as merger vel non would be most for his benefit. So a presumption against the existence of an intention to merge on the part of the owner of the two interests has been recognized when there was a junior incumbrance on the property, since the effect of a merger in such case would be to accord priority to the junior incumbrance over the claim of such owner." (Emphasis added.)
In Powell on Real Property, § 459, the rule is similarly stated and it is said:
"As in the case of the acquiring mortgagee, a mortgagor is not handicapped by merger on acquiring the mortgage where intervening liens are present. Also, third parties are not prejudiced by merger, as where money is loaned to the mortgagor for the purpose of acquiring the mortgage, and the lender's equitable lien is protected against junior claimants by keeping the acquired mortgage alive, to the extent of the advances, for his benefit."
To the same effect, see: Thompson on Real Property, § 4798; 51 Am.Jur.2d, Liens, § 47; 53 C.J.S. Liens § 17(5).
In Houck v. Overcash, 282 N.C. 623, 193 S.E.2d 905, Chief Justice Bobbitt, speaking for the Court, said:
"`Where a party primarily liable on a judgment pays the judgment, the judgment is discharged and there can be no right of assignment.' 5 Strong, N.C.Index 2d, Judgments § 54. The law applicable when payment is made by a stranger having no interest in the judgment is summarized in 49 C.J.S. Judgments § 557, as follows: `Although a judgment creditor is not bound to accept payment from a stranger * * * yet, where he does accept such payment, he is precluded from further recovery, and the judgment *280 will be kept alive for the stranger's benefit, rather than extinguished, when, and only when, there is an intentional agreement or understanding to this effect * * *. [T]he taking of an assignment affords unequivocal evidence of an intention not to satisfy the judgment unless it is taken so long after the payment as to evidence the fact that it was only an afterthought. Such an assignment is valid and the judgment remains unextinguished in favor of a person in whose behalf it is obtained, as well where his credit is accepted as the consideration of the assignment as where it is for a payment in cash made by him.'" (Emphasis added.)
In the present case, the evidence is overwhelming that Carolina-Albemarle Corporation did not intend to extinguish the lien of the Quible judgment when it acquired such judgment. The rights of its assignee, the defendant bank, would, of course, be the same as those of Carolina-Albemarle Corporation had it retained the Quible judgment.
The plaintiff contends, however, that this is not the entire picture. The plaintiff's complaint, considered as an affidavit in the Superior Court, presently uncontradicted in the record and supported at least in part by a lengthy and detailed affidavit of the plaintiff's president, John Waff, alleges:
"Defendant Carolina-Albemarle was formed by defendant Spencer Berger and at all times complained of the said defendant Carolina-Albemarle and the said defendant Vacation Properties are and were wholly owned and controlled by defendant Spencer Berger and have been used by him as his alter ego in respect to matters pertaining to the aforesaid property in Salem Township, Pasquotank County, North Carolina, and in particular said corporations have been used by the said defendant Spencer Berger and the defendant Bank in an effort to extinguish the valid lien of plaintiff against said described 48.672 acre tract by purporting to assign to defendant Bank the judgment obtained by F. Richard Quible against defendant Vacation Properties, Inc., said purported assignment being after said Quible judgment had been paid and extinguished or simultaneously with the payment and extinguishment of said Quible judgment.
"That at all times complained of the acts and transactions on the part of defendant Carolina-Albemarle, defendant Vacation Properties, and defendant Spencer Berger are and were in reality acts and transactions by one and the same party. That the acts and transactions on the part of defendant Carolina-Albemarle, defendant Vacation Properties, defendant Spencer Berger, and defendant Bank have been done by them in concert in their effort to deprive plaintiff of its valid lien on said described 48.672 acre tract of land, which in contemplation of law and in fact the transaction or transactions amount to a payment of the aforementioned Quible judgment and in consequence thereof plaintiff is now the holder of a first lien against said described 48.672 acre tract pursuant to plaintiff's aforementioned judgment against defendant Vacation Properties."
The mere fact that all of the outstanding shares of stock of each of two corporations are owned by one individual, who is the chief executive officer of each corporation, does not necessarily destroy the corporate entities so as to make the two corporations and the sole stockholder one and the same person in contemplation of the law. Where, however, the corporations are so operated that they are mere instrumentalities or alter egos of the sole or dominant shareholder and a shield for his activities in violation of the declared public policy or statute of the State, or for the purpose of fraud, the corporate entities will be disregarded and the corporations and the shareholder treated as one and the same *281 person. Henderson v. Finance Co., 273 N.C. 253, 160 S.E.2d 39; United States v. Milwaukee Refrigerator Transit Co. (7 Cir.), 142 F. 247; Fletcher, Cyclopedia of Corporations, §§ 41, 41.1 and 45; 18 Am.Jur.2d, Corporations, §§ 14-17; 18 C.J.S. Corporations § 7b.
Whether Vacation Properties, Inc., and Carolina-Albemarle Corporation were, in fact, so created, controlled, dominated and used by Berger as to make Carolina-Albemarle Corporation the mere alter ego of Vacation Properties, Inc., must be determined on the final hearing of this matter on its merits. If so, the two corporations must be regarded, for the purposes of this litigation, as one and the same person. In that event, the transfer of the Quible judgment to Carolina-Albemarle Corporation had the same effect as a transfer thereof to Vacation Properties, Inc., the judgment debtor, and thereby the judgment debt and the judgment lien were extinguished under the above mentioned rule and could not, thereafter, be assigned to the defendant bank.
The uncontradicted affidavits of the plaintiff concerning the relationship between Carolina-Albemarle Corporation, Vacation Properties, Inc., and Berger are sufficient to constitute a showing of probable cause for believing that the plaintiff may, upon the final determination of the merits in the matter, prevail upon its alleged equity.
Thus, the plaintiff, for the purpose of establishing his right to a preliminary injunction, has shown probable cause to believe that, at the final hearing of the matter upon its merits, he may be able to establish that the lien of the Quible judgment upon the land in question has been extinguished so that the land may not lawfully be sold under an execution issued upon the said judgment, and has shown a basis for reasonable apprehension that such a sale will damage the plaintiff irreparably. Consequently, the preliminary injunction should have been issued, continuing the restraining order issued by Judge James in effect until the final determination of this action.
Furthermore, the plaintiff alleges in its complaint, considered as an affidavit and as yet uncontradicted, that the defendant bank has other security for its claim against Carolina-Albemarle Corporation and its claim against Vacation Properties, Inc., from which other security it can obtain full payment and satisfaction of such claims without resorting to the land here in question, which is the plaintiff's only security for its claim. As stated by Justice Bynum, speaking for this Court in Jackson v. Sloan, 76 N.C. 306, "[W]hen one creditor can resort to two funds for the satisfaction of his debt, and another to one only of the funds, the former shall first resort to the fund upon which the latter has no claim, as that by this means of distribution both may be paid." See also: Realty Co. v. Wysor, 272 N.C. 172, 158 S.E.2d 7; Trust Co. v. Godwin, 190 N.C. 512, 130 S.E. 323; Harrington v. Furr, 172 N.C. 610, 90 S.E. 775; Pope and Co. v. Harris, 94 N.C. 62. For this reason also, the preliminary injunction should have been issued, continuing in effect to the final determination of the action the restraining order entered by Judge James. Whether, in fact, the defendant bank does hold such other security for the payment of its claim is a question to be determined at the trial of the action on the merits.
The judgment of the Court of Appeals is, therefore, reversed, and the matter is remanded to the Court of Appeals for the entry by it of a judgment reversing the order of Judge Lanier and remanding the matter to the Superior Court for the entry of a preliminary injunction restraining the sale of the land here in question under execution issued upon the Quible judgment pending the final determination of this action.
Reversed and remanded.