Posting for

Tuesday, October 27, 1998

by: Tim Ward

tward@firstam.com

and: Bert Rush

brush@firstam.com

LOST PROMISSORY NOTES/ESCROW AND CLOSING/TITLE UNDERWRITING

Tim Ward (Oakland) writes:

We have several different approaches toward underwriting lost promissory notes in my region. Some of our offices require surety bonds naming the trustee as the obligee as a condition to pay the beneficiary. Others accept substitutions of trustee and reconveyances executed by the beneficiaries. The latter seems to be the industry practice. If the beneficiary is missing or dead, and the obligation is paid, we typically request the (California Civil Code section) 2941.7 bond.

We have had only one claim in my region over the last 7 or 8 years based upon an unrecorded assignment. The original note and deed of trust had been assigned by an individual (Lundell). Later Lundell assigned the note and deed of trust to a partnership which (assignment) was not recorded. When we asked Lundell for the original note in connection with paying off the loan, he claimed the note was lost. We accepted his affidavit of lost note, substitution of trustee and reconveyance, and insured the sale of the property to a third party purchaser.

Subsequently the partnership demanded that we pay it the full amount owed under the note. We took the position that the obligation was paid and that the partnership's remedy was against the assignor, not the property. The borrowers were unaware of the unrecorded assignment. They had made their loan payments to Lundell. Commercial Code Section 9813(3) requires the assignee to provide the debtor with notice of its assignment. Without such notice, the debtor is not liable for payments made to the assignor. Further, since the borrowers were without knowledge of fraud or facts other than disclosed by the public records, they should be able to rely on the recorded assignment to Lundell. (See Peterson v Peterson, [1946] 169 P.2d 474).

We eventually paid the partnership about $6000 of the $50,000 it demanded. Of course the affiant, Lundell, was long gone.

Based on our claims experience, in residential transactions if we are satisfied that the borrowers are making payments to the record beneficiary, in the absence of the appearance of fraud we should be in the position to accept the affidavit of ost note from the beneficiaries and their substitution and reconveyance.

I would appreciate your thoughts.

Reply: I agree with your practices--including that of requiring the sec. 2941.7 bond if the beneficiary is missing or dead.

I also agree with your analysis of that claim--and the result which, I take it, was a payment calculated to roughly equal costs of defense. I think the same analysis would up in other states--in the absence of actual or constructive knowledge of an assignment the borrower must pay his original beneficiary.

More frequent than the claim you describe is the situation where we issue a payoff check to a mortgage broker acting as the loan servicing agent--but then the broker pockets the money and doesn't pay its investors whose names appear on a recorded "Notice of Assignment." When the broker disappears, or files BK, the assignee/beneficiaries come out of the woodwork like ants in the summer. We generally have just as good a defense against these assignees as you describe above, but usually end up settling for something like costs of defense. Of course, the better practice might be to make payoff checks payable to assignees of record, or jointly payable to the servicing agent and the assignees, but I don't know to what extent we're doing so. (And, the way mortgage lending has been done in the past few years, I suppose we don't see the layperson/unsophisticated investor/assignee so much as we did in years past. A good thing.)

Questions, comment, argument? Just press the "reply" button and send your thoughts....

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Following up on Tuesday's posting Tim Ward (Oakland) writes:

We had a claim a few years ago where escrow paid the mortgage broker instead of the assignee under the recorded assignment in a "refi" transaction based upon a loan servicing agreement. Subsequently, after the mortgage broker went to prison, the investor attempted to enforce the deed of trust. We obtained an injunction, but the court denied our summary judgment motion. We filed a writ. The appellate court held in its unpublished decision that the borrower was entitled to a written notice of the transfer of the servicing of the indebtedness to another person (the investor) pursuant to Civil Code Section 2937. Since he was not in receipt of such notice, the borrower was not liable to the investor for any payments made to the broker. We paid $25,000 in attorneys' fees which was a far better result than paying the investor the $90,000 he demanded.

Reply: Sounds like you were granted a writ of mandamus --directing the trial court to enter summary judgment in the borrower's favor. These are rarely granted--so maybe that tells us the appellate court felt the trial court was clearly and seriously in error. Might also explain why the appeals court decision wasn't certified for publication.