U.S. Bank v. Seeley, 953 N.E.2d 486 (Ind. Ct. App. 2011) sheds light on what a “payoff” might mean in Indiana. The case also reminds purchasers, their lenders and their title insurance companies to obtain releases of prior mortgages at the closing table.
The story. In 1998, Seeley obtained a home equity line of credit (HELOC). In 1999, Seeley entered into an agreement to sell the subject real estate. In advance of the closing, the title company discovered the HELOC mortgage and sent a “mortgage payoff request” to the HELOC lender. The next day, the HELOC lender sent a “consumer loan payoff request” that listed the payoff amount, with a per diem. The transaction closed, and the title company sent the HELOC lender a check for the full amount identified in the HELOC lender’s payoff request. In the transmittal letter, the title company instructed the HELOC lender to “close account and release mortgage. This property has been sold.” The HELOC lender cashed the check but did not release its mortgage or close the line of credit. The HELOC lender’s successor subsequently allowed Seeley to draw on the line of credit. Seeley later defaulted, causing the HELOC lender to file suit to foreclose on the real estate, which a subsequent purchaser owned at the time.
“Payoff.” In the trial court proceedings, the subsequent owner argued that the HELOC mortgage should be released. The owner submitted an affidavit from the 1999 title agent stating, in part:
[t]he word “payoff” has a particular meaning in the real estate mortgage and title industry. When a closing agent . . . receives a “payoff” figure, it understands that to be the amount the lender requires for a release of its mortgage, especially when the payoff figure contains no other instructions.
The evidence also showed that, after the closing, the HELOC lender never contacted the title company to advise that the payoff check or delivered documents were insufficient to obtain a release.
Obligation to release? The subsequent owner argued that the payment, at closing, of the then-existing obligation, together with the circumstances surrounding it, obligated the HELOC lender to release its mortgage. The HELOC lender contended that Seeley was required to provide a termination statement before it was bound to record a release.
Rule 1 – not automatic. The Court first noted that “unlike a term note, a [HELOC] is not automatically terminated when the balance is paid down to zero . . ..” Such a rule would violate the very nature of the credit. The Court in U.S. Bank concluded that the post-closing payment to the HELOC lender did not in and of itself terminate the HELOC.
The real issue. On the other hand, the Court said that the HELOC did not necessarily survive. The test is whether the evidence establishes that the parties intended for the payment to terminate the HELOC. The evidence in U.S. Bank showed just that - the “payoff” was the amount required to secure a release of the mortgage. The title company remitted the requested amount, and the HELOC lender accepted it. The icing on the cake was the title company’s letter, with the check, stating “please close account and release mortgage. This property has been sold.” Since the HELOC lender did nothing other than accept the cash, the payment obligated the HELOC lender to release its mortgage.
Distinguishing Ping. The HELOC lender relied on the 2008 Ping opinion, the subject of a prior blog post. Under somewhat similar circumstances, the Ping Court did not require the release of the HELOC mortgage, even though there were payments that reduced the balance to zero. The distinguishing factor between U.S. Bank and Ping was that the loan documents in Ping specifically required the mortgagor/owner to terminate the credit agreement before the mortgagee was required to release. The mortgagor in Ping took no such action. In U.S. Bank, the loan documents contained no such special requirements, but even so, unlike in Ping, the title company in U.S. Bank specifically requested a release of the mortgage.
If you or your counsel are ever faced with a situation in which a line of credit mortgage was not released at a closing, despite a payoff, you should read the U.S. Bank and the Ping decisions for how Indiana courts might resolve the issue. One way to prevent the problem in the first place is to require the lender to deliver an executed release at closing. That way, the title company or the purchaser’s lender can control its recording, rather than relying upon the prior mortgagee/ lender to do so post-closing.