Daily Development for Tuesday, October 14, 2008
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Husch Blackwell Sanders
Kansas City, Missouri

MORTGAGES; DISCHARGE; EQUITABLE ESTOPPEL:  Where a deed of trust securing a line of credit is refinanced, but the mortgage and line of credit are not released, and the first lender subsequently advances additional funds under the line of credit, refinancing lender cannot assert equitable estoppel in a priority dispute where he has record notice of additional requirements (in addition to the payoff) to obtain a release of the prior-recorded deed of trust.

Washington Mutual Bank, F.A. v. ORNL Federal Credit Union, ___S.W.3d___, 2008 WESTLAW 2510587 (Tenn. Ct. App. 6/24/08).

In April 2001, Locketts   borrowed $100,000 from ORNL under a home equity line of credit loan, secured by a deed of trust on their home. The deed of trust was recorded in May, 2001. In March 2002, the Locketts refinanced their home with TNBank for $127,000. This loan was also secured by a deed of trust on their home. TNBank's title company obtained payoff amounts from ORNL on two loans of $98,418.43 and $2,050. The title company sent checks to ORNL for these payoff amounts, but failed to request a release of ORNL's deed of trust. On March 25, 2002, ORNL sent TNBank vouchers verifying full payment of the ORNL loans, and TNBank assigned its $127,000 note and deed of trust to Washington Mutual. Washington Mutual recorded a week later.

Unknown to the title company, TNBank and Washington Mutual, ORNL did not release its deed of trust, and the home equity line of credit with ORNL remained open. Between April 18, 2002 and January 22, 2004, the Locketts borrowed an additional $95,887.87 from ORNL. The title company and Washington Mutual later discovered that the ORNL deed of trust had not been released and the Locketts had incurred the additional debt. Around the same time (surprise!!), the Locketts began to default on their loan payments to both lenders, and eventually filed a bankruptcy petition. Predictably, ORNL did not comply with the title company's request that ORNL release its deed of trust against the property, and began foreclosure proceedings.

Washington Mutual filed a complaint against ORNL for "deliberately and wrongfully refus[ing] to release its Deed of Trust," seeking to enjoin ORNL from foreclosing on the property and requesting that Washington Mutual's deed of trust be given priority over ORNL's. The parties allowed the foreclosure sale to take place and have the proceeds ($108,293.09) placed in escrow pending the trial court's decision. The trial court held that ORNL's deed of trust was released and awarded Washington Mutual the foreclosure proceeds as first lien holder, reasoning that ORNL failed to follow its standard procedure of advising parties requesting a line of credit payoff of the steps required to cancel the line of credit and have the deed of trust released. ORNL appealed.

The issue on appeal was whether the trial court erred in ruling that Washington Mutual's deed of trust had priority over ORNL's on the theory that ORNL was equitably estopped from asserting its deed of trust as a result of its failure to comply with its own company procedure by not notifying the title company of additional action required for release of the deed of trust.

The court of appeals held that there was no estoppel and ORNL’s lien was still good for the later-advanced monies.  The court stated the elements of equitable estoppel as follows:   First, with respect to the party against whom equitable estoppel is asserted, the plaintiff must show "(1) Conduct which amounts to a false representation or concealment of material facts, or, at least, which is calculated to convey the impression that the facts are otherwise than, and inconsistent with, those which the party subsequently attempts to assert; (2) Intention, or at least expectation that such conduct shall be acted upon by the other party; [and] (3) Knowledge, actual or constructive of the real facts." Second, with respect to the party asserting estoppel, the plaintiff must show "(1) Lack of knowledge and of the means of knowledge of the truth as to the facts in question; (2) Reliance upon the conduct of the party estopped; and (3) Action based thereon of such a character as to change his
 position prejudicially" (emphasis in original).

The title company and Washington Mutual failed to prove that they lacked "the means of knowledge of the truth as to the facts in question," because they had record notice of the steps required to release ORNL's deed of trust. Those steps were included in a release provision filed with ORNL's deed of trust in 2001.

The court took the view that due diligence required the title company to examine the contents of the ORNL deed of trust for any requirements concerning its release. Under Tennessee statutes, record notice is notice of both the existence and content of a document. In addition, ORNL made no affirmative misrepresentation that a release of the deed of trust would require no action beyond a payoff of the underlying debt, nor did ORNL "induce any party to believe that it would claim no lien on the Locketts' home as a result of payoff alone." Therefore, the court of appeals reversed the judgment of the trial court, holding that ORNL could not be estopped from asserting its deed of trust. Because it was recorded first, ORNL's deed of trust had priority over Washington Mutual's.

Comment: It’s “tough love,” but clearly the person who stood to lose the most at the time of the refinancing was the refinancing lender, and it should have established that the line of credit had been closed and that the mortgage had been released.  One suspects, based upon what we’ve been hearing about the conduct of parties engaged in the once red hot refinancing game, this won’t be the only story like this that we’ll hear. 

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