Sunday, March 27, 2011

FYI: Ind App Ct Says Closing Agent Entitled to Rely in Good Faith on Payoff Statement, Despite Contrary Indications

The Court of Appeals of Indiana recently held that Indiana law requires the release of a mortgage, where the written mortgage payoff statement misstates the amount of the payoff and is relied upon in good faith by a closing agent, even though the closing agent might have reason to believe the payoff statement is inadequate.  A copy of the opinion is attached. 

A new lender agreed to fund the borrower's refinance.  Before closing of the refinance transaction, the mortgage broker sought a formal payoff statement.  The Payoff Statement included the representation that the payoff on the borrower's loan was $268,000.  The closing on the refinance loan occurred the day after the mortgage broker received the Payoff Statement.  The mortgage broker and closing agent presented evidence that they believed that the new refinance mortgage would be first in priority, paying off and replacing a prior mortgage loan.

The lender on the prior mortgage loan accepted the $268,000 in proceeds from the refinance, but did not release the prior mortgage.  Instead, two months later, the lender on the prior mortgage loan had the borrower execute a modifications to the older note and mortgage.  The prior lender did not inform the mortgage broker, closing agent, or new lender of this post-refinance activity. 

Thereafter, the borrower defaulted on the newer mortgage loan by failing to make payments when due. Consequently, the investor as to the newer mortgage loan filed a complaint to foreclose against the borrower and the old lender as to its unreleased mortgage.

The lender on the prior mortgage loan filed a counter- and cross-complaint asserting, among other things, its right to foreclose the older mortgage and asserting that it was in first lien position on the subject property.  The lender argued that the old note still existed and that additional amounts were owed on that note in connection with the post-refinance modification. 

The parties filed cross-motions for summary judgment, wherein the investor on the new loan asked the trial court to hold that the lender on the older loan was precluded from withholding the release of its mortgage pursuant to Indiana Code Section 32-29-6-13 ("Section 13"). 

Section 13 provides in relevant part as follows:

"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. . . .

In the alternative, the investor asked that the newer mortgage be deemed to have priority over the older mortgage through the doctrine of equitable estoppel. The lender on the older mortgage argued that its lien had priority based solely on the order of recording."

The trial court granted summary judgment in the older lender's favor and ordered that its mortgage had priority over the newer mortgage.  The appellate court reversed.

On appeal, the court cited the language of Section 13, noting that it was "undisputed that the Payoff Statement misstated the amount of the payoff."  As a result, the only question was "whether it can be held as a matter of law that. . . [the closing agent] relied upon the Payoff Statement in good faith and without knowledge of the misstatement."  The closing agent and mortgage broker both attested via affidavit that their representatives relied upon the payoff amount contained within the Payoff Statement. 

The lender on the older loan did not point to any evidence directly contradicting the affidavits, instead noting a number of circumstances that it contended could lead to a conclusion that the closing agent and mortgage broker did not rely upon the Payoff Statement in good faith or that they had knowledge of the misstatement. 

The lender on the older loan argued that because its mortgage contained a cross-collateralization provision, the mortgage broker and closing agent should have been on notice that its mortgage secured other debt as well.  The lender also noted that it sent the mortgage broker a mortgage verification form indicating that the current balance on its mortgage was $346,000, while the later-sent Payoff Statement indicated that the payoff of the loan was $268,000, arguing that the discrepancy should have put the mortgage broker and closing agent on notice that there was an error in the Payoff Statement.

In rejecting the older lender's arguments, the appellate court found that "the point of a payoff statement is to assure the parties hoping to pay off the loan of the final, total amount needed to pay off the loan."  Toward that end, the appellate court held that the mortgage broker and closing agent "were entitled to rely on the Payoff Statement." 

Additionally, the Court held that the older lender was "attempting to equate 'in good faith' with 'non-negligently,' which is not borne out by the relevant authority."  The Court stated that "'Good faith' means 'a state of mind indicating honesty and lawfulness of purpose; belief in one's legal right; and belief that one's conduct is not unconscionable.'"  Under this standard, the Court found that mortgage broker, closing agent, and newer lender all acted in good faith. 

Therefore, the Court held that the investor on the newer loan was entitled to a release of the older mortgage pursuant to Section 13, and summary judgment in its favor was warranted.


Ralph T. Wutscher
Kahrl Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois  60602
Direct:  (312) 551-9320 
Fax:  (312) 284-4751
Mobile:  (312) 493-0874

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