Signs Of The Times On The Potential Impact Of The Mortgage Crisis

Termination Of Mortgages In Indiana

As promised, this post will speak to the second issue in the Bank of America case that was the subject of my February 15 post.  This discussion will help secured lenders who may struggle with knowing whether Indiana law permits the release of a prior mortgage when such mortgage secured a revolving line of credit that has been paid in full.

Contracts and performance.  Due to the importance of the language in the 1999 Bank One mortgage, I must outline it here:

[W]ithout limitation, this Mortgage secures a revolving line of credit, which obligates [Bank One] to make future obligations and advances to [borrower] up to a maximum amount of $ 80,000.00 so long as [borrower] complies with all the terms of the Credit Agreement.  . . .  It is the intention of [borrower] and [Bank One] that this Mortgage secures the balance outstanding under the Credit Agreement from time to time from zero up to the Credit Limit as provided above and any intermediate balance.  . . .

PAYMENT AND PERFORMANCE. Except as otherwise provided in this Mortgage, [borrower] shall pay to [Bank One] all amounts secured by this Mortgage as they become due, and shall strictly perform all of [borrower's] obligations under this Mortgage.  . . .

FULL PERFORMANCE.  If [borrower] pays all the indebtedness when due, terminates the Credit Agreement, and otherwise performs all the obligations imposed upon [borrower] under this Mortgage, [Bank One] shall execute and deliver to [borrower] a suitable satisfaction of this Mortgage and suitable statements of termination of any financing statement on file evidencing [Bank One's] security interest in the Rents and the Personal Property. [Borrower] will pay, if permitted by applicable law, any reasonable termination fee as determined by [Bank One] from time to time.  . . .

In 2001, when a portion of the proceeds from the Bank of America loan was used to pay the entire outstanding balance of the Bank One loan, Bank One did not send “correspondence or instructions” to Bank of America or the borrower.  In addition, neither the borrower nor Bank of America took action to terminate the Bank One credit agreement. 

The fight.  The litigation surrounded whether the prior Bank One mortgage had priority over the subsequent Bank of America mortgage.  Bank of America contended that, under I.C.§ 32-28-1-1(b), it was entitled to a release of the Bank One mortgage because Bank of America discharged the debt underlying that mortgage and, furthermore, because that mortgage was ambiguous as to whether written notice of termination by the mortgagor was required for the mortgage to be released.  I.C. § 32-28-1-1(b) states, in pertinent part:  “When the debt . . . on . . . the mortgage . . . has been fully paid, lawfully tendered, and discharged, the owner, holder, or custodian shall:  (1) release; (2) discharge; and (3) satisfy of record; the mortgage . . ..”  The Court concluded that the Bank One mortgage stated three requirements for “full performance:”  (1) borrower must pay all the indebtedness when due, (2) borrower must terminate the credit agreement and (3) borrower must perform all other obligations.  Each of those three was required of the borrower before Bank One was obligated to release the mortgage. 

Bank One the winner.  It was undisputed that, even though the indebtedness under the mortgage had been paid, the borrower took no affirmative action to terminate the credit agreement.  As a result, the Court held that Bank One was not required to release its lien on the real estate.  Bank of America complained that the Bank One mortgage did not require written notice of termination and that Bank One failed to notify the borrower or Bank of America what act was required to terminate the credit agreement.  The Court rejected the argument and reasoned that the Bank One mortgage “clearly require[ed] some affirmative act of termination.  . . .  The Bank One mortgage required [borrower] to terminate the Credit Agreement; Bank One did not need to reiterate to [borrower] her contractual obligations.”

Always follow-up.  The important court holding here is that “absent documentation to the contrary, we decline to hold that merely to pay off an outstanding balance is sufficient to terminate a revolving line of credit, as that would violate the very nature of the credit.”  Unlike a mortgage securing a term note, the Bank One mortgage secured a revolving line of credit that contemplated future advances, regardless of whether there was an occasional zero balance. 

Secured lenders operating in Indiana, particularly those involved in refinancing, need to be aware that, if confronted with facts similar to the Bank of America case, merely paying off a line of credit may be insufficient in itself to terminate a prior note/credit agreement/mortgage.  So, review and analyze the loan documents and ensure you jump through all the hoops to terminate the prior transaction and lien.  Otherwise, you may be faced with an unexpected subordinate lien position.