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Payoff Statements: Handle With Care

In Indiana, mortgage lenders and their servicers should be very careful when issuing payoff statements.  Inaccurate statements could lead to the unintentional release of a mortgage.  Sutton Funding v. Jaworski, 2011 Ind. App. LEXIS 228 (Ind. Ct. App. 2011) illustrates this point and discusses the pertinent statute, Ind. Code § 32-29-6 “Mortgage Release by Title Insurance Companies.” 

The mess.  In 2004, the borrower in Sutton Funding received a mortgage loan from the lender in the amount of $325,000.00.  In 2007, the borrower sought to refinance the loan through a mortgage broker, which sought, and obtained, a payoff statement from the lender.  The payoff statement identified a payoff of $268,000.00 and articulated no other conditions.  The borrower closed on a $292,050.00 loan with a new lender.  $268,000.00 of the funds went to the original lender purportedly to satisfy the 2004 loan.  The closing called for the new lender to hold a first mortgage and for the original lender’s mortgage to be released.  The original lender accepted the money but failed to record a release of its mortgage.  Instead, the original lender and the borrower somehow executed loan modification documents but did not notify the subsequent lender, its broker or the title agent of this post-refinance activity. 

Legal action.  The borrower defaulted on the 2007 mortgage loan, and the new lender filed a foreclosure action.  In the suit, the original lender contended that the 2004 loan (and the mortgage) still existed because the debt had not been fully satisfied by the $268,000.00 payment.  The new lender relied upon I.C. § 32-29-6-13 and asserted that, by virtue of the payoff statement, Indiana law required the original lender to release the 2004 mortgage.

I.C. § 32-29-6.  This statute has only been around since 2002, and Sutton Funding appears to be the sole Indiana appellate court opinion that has construed it.  The statute is not limited to residential or consumer cases, although it only applies to mortgages securing loans in the original principal amount of $1,000,000 or less.  The guts of the statute relate to the who, what, when, where, why and how of “certificates of release.”  Sutton Funding focused on Section 13, which states: 

A creditor or mortgage servicer may not withhold the release of a mortgage if the written mortgage payoff statement misstates the amount of the payoff and the written payoff is relied upon in good faith by an independent closing agent without knowledge of the misstatement . . ..

Release mandated.  In Sutton Funding, there was no question that the payoff statement misstated the payoff amount.  The Court walked through the pertinent factual and legal points and concluded as a matter of law that both the broker and the title agent relied upon the payoff statement in good faith and without knowledge of the misstatement.  The result was an order compelling the release of the 2004 mortgage.  Due to the mistake in its payoff statement, the original lender’s claim to its collateral vanished.

All not lost.  As an aside, the original lender still could collect the full amount owed from the borrower.  Pursuant to language in Section 13, the debt itself will not be extinguished - only the mortgage.  An unsecured claim will survive.

Wrap-up.  Again, Sutton Funding and Indiana’s “Mortgage Release by Title Insurance Companies” statute do not apply to loans over $1,000,000.  That said, it’s conceivable that a Court could reach a similar result, based on common law principles, in a larger commercial case.  Sutton Funding is a powerful reminder that any written representations to a borrower with regard to a payoff should be accurate and should identify any applicable conditions to a release.