Posting for 

Tuesday, July 21, 1998

by: Bert Rush

brush@firstam.com

RELEASES TO COME/REVOLVING CREDIT LINES/ESCROW AND CLOSING

Yet another example of risks inherent in closing with releases to come is provided by the decision of an Illinois Court of Appeal in First American Title Insurance Company v. TCF Bank (1997) 286 Ill.App.3d 268, 676 N.E.2d 1003. This would sound familiar--but it's worse than familiar. In this case, the mortgages competing for priority are held by related lenders.

In May 1989 Patricia Bartholomew took out a revolving line of credit with TCF Bank. The credit limit was $40,000. Repayment was secured by a mortgage on her home in Rockford, IL. The recorded mortgage stated in part:

A year later Bartholomew refinanced with TCF Mortgage, taking out a traditional" loan (secured by a fixed mortgage). As I understand it, TCF Mortgage was a subsidiary or sister corporation of TCF Bank (Bob/Vince: keep me honest on this). Anyway, an agent of First American handled the refi.

On May 18, 1990, in response to our agent's request, TCF Bank sent the agent a "payoff letter" indicating a demand of $35,785 with the additional statement: "this is a credit line; checks may be outstanding. Please call ...for an updated payoff figure before closing."

That same day the agent sent a check to TCF Bank for $35,785 with the notation: "For Mortgage Payoff."

TCF Bank cashed this check on May 23, 1990, but failed to provide or record a release of its credit line mortgage. The agent caused First American's loan policy to be issued insuring TCF Mortgage.

Bartholomew again drew from her old credit line, defaulted, and TCF Bank foreclosed. First American agreed to defend priority of the insured mortgage (in favor of TCF Mortgage), subject to a reservation of rights.

This lawsuit was filed by First American to obtain a release of the TCF Bank lien, to establish priority of the TCF Mortgage lien, and for damages.

On cross motions for summary judgment, the trial court found in favor of First American--ruling that (1) as a matter of law, TCF Bank was not required to release its lien; and (2) as a matter of equity, TCF Bank must either release the lien or return the payoff funds provided by our agent.

The Court of Appeal affirmed in part, and reversed in part--first finding that under the terms of its loan agreement with its borrower TCF Bank would not release its lien until the borrower paid all amounts owed and (the borrower) cancelled the agreement. Here, there was no evidence the borrower had cancelled the credit line and "nothing in the record to indicate that (TCF Bank) should have reasonably believed that (First American or its agent) possessed the actual or apparent authority to request a release on Bartholomew's behalf."

Next the Court discussed the equitable doctrines of equitable subrogation, estoppel and unjust enrichment--as possibly having a bearing on outcome of this case--concluding there was insufficient evidence on the record to justify summary judgment on any theory. So the case was remanded for further proceedings--in which we could lose the whole enchilada.

In a concurring opinion, one justice said the Court should give the trial court more guidance as to how the case should be decided and, based on these facts, this justice would rule that our agent's expectation this lien would be released was unreasonable. Said he or she: "This will be a difficult case on remand. One of these parties will be burdened with $40,000 of apparently uncollectible debt."

Our petition for appeal to the Illinois Supreme Court was denied and (last I heard) the case is still pending.

I think that many escrow/closing people would hear these facts and think "Yeah...routine deal." But add the dynamics of everything going wrong after closing--and put the same facts before a panel of judges who (presumably) have done little or no real estate closing work--and things begin to look grim.

People who do closings appreciate being reminded that--from time to time--others involved in routine transactions might not be on the same wavelength as we are. They seem to not tire of hearing examples of screw-ups they can relate to. It's also interesting--and educational--to hear how others judge our practices and procedures.

I think this case is a great training tool.

Questions, comment, argument--just press the "reply" button and send your thoughts....

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Following Tuesday's posting Alan Rubin (Uniondale, NY) writes:

We have had a few claims involving the apparent payoff of a prior credit line mortgage, where the borrowers borrowed on the credit line subsequent to the closing on the refi, and where the "credit line lender" refused to provide us with a satisfaction of the credit line mortgage.

In our cases, although the transmittal letter [of the pay-off amount] did not request that the credit line be "frozen", the letter did indicate that the payment was the full amount as set forth in the payoff letter, and a satisfaction of mortgage was enclosed with the payment.

The leading New York case on point is Barclay's Bank of New York v.Market Street Mortgage Corporation, 187 A.D.2d 141, 592 N.Y.S.2d 874 (3d Dept. 1993), where the court stated:

The courts involved with our claims followed the reasoning of the court in Barclay's Bank, supra, and granted summary judgment in our favor.

Jack Murray (Chicago) writes (with more background on the TCF Bank case):

This is one of the more outrageous opinions written in recent years in Illinois, by the ciphers on the Illinois Appellate Court who don't have a clue about real-estate or contract law (let alone equitable considerations).

The lawyer who tried this case for First American is a good friend of mine. He has been trying to settle this matter and thinks that the parties are close (having actually preliminarily agreed to a settlement), but TCF Bank has been dragging its feet. As with all good bureaucratic institutions, the decision has to be filtered through several committees, boards and other levels of review.

Discovery and depostions have been completed, which our lawyer believes went very well, in the sense that he was able to obtain some damaging admissions from some of the dimmer-bulb TCF employees. Copies of the bank's written policies and procedures regarding mortgage releases were requested by First American's attorneys, but the box containing these mystical documents somehow inexplicably "disappeared." (Curiouser and curiouser!).

The deal offered is that TCF Bank will agree to drop any claim against First American under its title policy, in exchange for First American's agreement to drop its lawsuit against TCF.

As with most civil cases filed in Cook County, Illinois, the file is gathering dust and an actual trial on the remanded issues is not even on the court's radar screen; no hearing date has even been calendered.

Apparently TCF Bank has its own in-house title-insurance operation, and they are a little nervous that this case may eventually come back to snap them in the tush. As the saying goes, Be careful what you wish for . . . .

The sad thing is that this is a reported appellate decision, and this one is bad law. If we settle, this turkey will still be strutting its stuff and rearing its ugly thick head every once in awhile.

Reply to Jack: Both sides have already "lost," each probably having paid legal expenses exceeding the amount in controversy ($40K) just to get back to square one.

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Following up on Tuesday's posting, Jon Reynolds (Phoenix) writes:

Since we're already in the action in Illinois, my comment is only relevant to future situations; but, notwithstanding "good customer" considerations, the "created, suffered, assumed" exclusion might place the burden back where it belongs -- with the lender -- when such an insured fails to take responsibility for one of its own divisions that it claims is a separate entity for loan processing purposes, etc. . . . or, at least the exclusion may work such wonders in Utah: I commend to your reading the case of VALLEY BANK & TRUST COMPANY v. U.S. LIFE TITLE INSURANCE COMPANY OF DALLAS, 776 P.2d 933 (Utah Ct. App. 1989).

And, Tim Ward (Oakland, CA) writes:

We closed an escrow in Contra Costa County for the refinance of property located in Redondo Beach (L.A.) worth about $750,000. The lender under the first deed of trust was owed $405,000. The second deed of trust secured a line of credit for $100,000 in favor of Homecomings Financial Network. The new loan for $500,000 which was insured as a first deed of trust.

Prior to close, we sent Homecomings a request for a payoff demand pursuant to Civil Code Section 2943. In our request we stated that "First American shall depend upon your demand to be a full payoff of the debt and quarantee of a full reconveyance." The Homecomings payoff demand stated that it would terminate in two weeks, (escrow closed in 4 1/2 weeks), provided the total amount owed and the per diem rate of interest, and required us to contact them for a verbal update. Further, the demand required that the borrowers sign the bottom indicating their consent to cancel the line which they did not do.

We closed escrow without contacting Homecomings, paid off the first deed of trust, tendered the amount stated on the Homecomings demand, plus per diem interest, which Homecomings accepted, and put our file away.

Later, the borrower borrowed $52,000 from the credit line. Further, Homecomings advanced $19,000 before escrow had closed. As a result, Homecomings refuses to reconvey until they are paid $71,000. They also refuse to freeze the line.

We took the position that First American is authorized under (Calif. Code of Civil Procedure section) 2943 to rely on Homecomings' payoff demand, and that Homecomings knew we intended to payoff their deed of trust in full (their payoff demand states that it is tendered to us "per our request"). Homecomings states that it doesn't matter; they are owed the full amount that was advanced.

I would appreciate your thoughts. I return from vacation on July 29.

Reply to Tim: THEY REFUSE TO FREEZE THE LINE? What are they thinking? You, Tim, are in the maw of idiocy. They may be too complacent because their loan is performing, or you may be dealing with someone who feels responsible for the snafu--and hopes you'll go away. I think I'd write a letter to Homecomings' CEO explaining the situation and strongly suggesting they freeze the line so as to mitigate damages for whichever side is being set up by this out-of-control borrower. (First though, I'd probably want to nail down what documentation our insured lender has proving the borrower understood and agreed the credit line was to be paid off and closed.) Then, it seems to me you either have to threaten litigation (which might be enough if the CEO has good business sense) or initiate same--in order to employ discovery procedures

to nail down what the borrower has to say. It may be the borrower will play the game of denying he/she understood the credit line was to be closed--or its deed of trust was to be reconveyed--saying he/she just signed whatever docs were put before them. In that case, I'm afraid you're in for the long haul--having to put on an expensive and chancey motion for summary judgment or, worse, having to go to trial--with all the uncertainties and "reasonable expectation" opining we saw in the TCF Bank decision. Final suggestion: When you write the Homecomings CEO, suggest they freeze the line and, in exchange, we'll agree to submit the case to binding arbitration--or mediation --ASAP. The risk there, of course, is you don't have the advantage of the discovery statutes--so you have to make do with evidence in hand and probably can't subpoena the borrower(s) to testify--and, by definition there's no right of appeal, which sometimes means the closest you'll get to seeing justice done is the old "split the baby in half" routine. The advantage of doing this, of course, is that it should dramatically reduce your legal expenses--which otherwise might exceed the amount in dispute.

Finally, before offering arbitration consider where it leaves the parties with respect to further actions against the borrower.

Any other LandSakes "savants" want to weigh in--we know you've "been there." Just press the "reply" button....

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Following up on yesterday's Further Replies to Tuesday's posting, Keith Pearson (Glendale/L.A.) writes:

Regarding Tim Ward's problem. In a perfect world we would have a freeze on the account signed by the borrower to present with the demand. Notwithstanding that fact, I agree with the course of action you suggest with a slight modification. Instead of seeking out the CEO and trying to reach him or her with a letter or phone call, I would talk and write to the manager of the division and educate them. It also may be worthwhile to spend a few hundred bucks to have a outside law firm write the letter since that will cause the problem lender to take your threat of litigation more seriously. Even though it will cost some money up front, I see it as a gamble of sorts to prevent the costs of litigation down the road. As aside, I hope Tim or someone in his office is checking the chain on a periodic basis to see if the lender is getting real frisky and starting foreclosure on the property. Even though it would be the stupidest thing they could do, I've unfortunately found that this is the option that occurs first as a possible pressure tactic for these lenders in the hope you will just pay the money and go away. Hope this helps.

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Following up on last Tuesday's posting, Jim Dondero (Grand Rapids) has this reply to Keith Pearson's comments:

Keith Pearson's suggestion is clearly the best way to avoid this problem, i.e. send the borrower's written directive to "terminate the account and record a discharge (or reconveyance)" along with the payoff check by overnight carrier. We have tried to do this in Michigan transactions since similar problems with revolving credit mortgages in recent years. When properly adhered to, the practice leaves the equity lender with virtually no "wiggle-room" for any later argument to the contrary.

I also agree that a letter from outside counsel would have more impact on the lender, and therefor produce a better result in the long run.

Reply to Jim: You're reminding me of something I picked up in a meeting several months ago--actually, suggested by a few escrow officers. Some of our problems these days in obtaining releases/reconveyances for paid-off credit line deeds of trust may be caused by paid-off lender reluctance to lose their loan and/or borrower relationship. While we pursue them for a release, they may be on the other phone with the borrower--trying to get the borrower to refinance the old credit line and the new loan together with the paid-off lender. I used to think these claims resulted from mistakes--mainly innocent--now I wonder....

Recently in the print media I've seen warnings that lenders have become too aggressive in lending, and many borrowers too quick to borrow. Isn't the fact that escrow/closing officers are now being asked to seize and cut up credit cards some kind of a red flag? I've heard of one closer destroying more than 50 cards in just one refi. You're right, we need to establish and follow procedures that keep everything straight up--and still close deals.