This is another post about a situation in which an older mortgage had not been released at a prior closing when it should have been. Tennant v. Fifth Third Bank, 2012 Bankr. LEXIS 4026 (S.D. Ind. 2012) (.pdf) teaches us that the subsequent foreclosing lender may not need to invoke the doctrine of equitable subrogation. The facts may require that the prior mortgage simply be released.
Common problem. Tennant was a battle between Fifth Third, which held a 2002 HELOC mortgage, and Chase, which held a 2007 mortgage loan used to refinance senior debt. The facts were undisputed that the Fifth Third loan had been paid off in 2005 but that the mortgage remained on title. The borrower continued to obtain advancements on the line of credit. The Court teed-up the issues as, first, whether Fifth Third had a valid mortgage lien against the subject property and, second, whether the doctrine of equitable subrogation rendered Chase’s mortgage lien superior to that of Fifth Third. In the end, the issue of equitable subrogation was “overshadowed” by the matter of whether Fifth Third held a valid mortgage lien.
Two keys. Fifth Third’s mortgage stated “upon payment of all Indebtedness, Obligations and Future Advances secured by this Mortgage, Lender shall discharge this Mortgage with any costs paid by Borrower.” Also, Indiana Code § 32-28-1-1(b) provides, in pertinent part, that: “when the debt . . . that the mortgage . . . secures has been fully paid . . . the holder . . . shall (1) release; (2) discharge; and (3) satisfy of record; the mortgage . . ..” Chase contended that Fifth Third was obligated to release its mortgage when the 2005 closing fully satisfied the HELOC balance.
Instructions? Fifth Third asserted that it was not required to release its mortgage absent explicit instructions from its borrower to do so, which instructions Fifth Third never received. But unlike in Ping, which was the subject of my 02/15/08 post on a similar issue, there was nothing in the Fifth Third mortgage requiring the borrower to request closure or to release its mortgage. On the contrary, the mortgage unambiguously stated that Fifth Third “shall discharge” its mortgage on full payment.
Lien negated. The Court in Tennant concluded that “Fifth Third was clearly required to discharge its mortgage on or about August 8, 2005, upon full satisfaction of the then outstanding loan balance.” The Court specifically addressed the Seeley decision, about which I wrote on 09/22/12, and the quandary that, by their nature, lines of credit are not automatically terminated upon a zero balance. The Court dismissed the problem by suggesting that loan documents should be drafted accordingly. Pursuant to the mortgage and I.C. § 32-28-1-1(b), Chase was entitled to a release of the Fifth Third mortgage. The Court did not need to determine whether Chase was entitled to equitable subrogation.
Keep I.C. 32-28-1-1(b) in mind. The Tennant predicament essentially was the same as that discussed in my 08/20/13 post that the doctrine of equitable subrogation resolved. Tennant provides a more powerful argument based on I.C. § 32-28-1-1(b), assuming the prior, unreleased mortgage contains language mandating the release of its mortgage upon payoff. The prior mortgage is not subordinated -- it’s gone.
If, as a secured lender, you find yourself in the pickle of needing to foreclose over a mortgage that was not released at a closing despite a payoff, study the loan docs for any payoff-related language that might assist. Even in the absence of language requiring the lender to release its mortgage, I.C. § 32-28-1-1(b) and Tennant suggest that you may be able to obtain a court order terminating the old mortgage.