Wednesday, July 9, 2014

FYI: 4th Cir Rejects Borrowers' Argument That Mortgage Insurance Payments Triggered Release Obligations

The U.S. Court of Appeals for the Fourth Circuit recently rejected two borrowers’ argument that mortgage insurance payments received by their lender and loan servicer triggered a release provision in the Deed of Trust.  Noting that the release provision was only triggered by the borrowers satisfying their loan obligations, the Court held that the quiet title claim failed because, in light of their failure to satisfy their loan obligations, the borrowers did not own legal title to the property.


A copy of the opinion is available at:


Appellants (Borrowers) obtained a mortgage loan, which was evidenced by a promissory note (Note), and secured by a deed of trust (Deed of Trust) encumbering Borrowers’ real estate.  Following their undisputed default under the Note, Borrowers brought a quiet title action in Maryland state court naming their lender and loan servicer as defendants.  Borrowers sought a declaration that defendants no longer held any interest in their property, and sought an order requiring them to release their liens and barring them from foreclosing on the property.


The quiet title action arose from Borrowers’ contention that their lender and loan servicer had received mortgage insurance benefits, as a result of Borrowers’ default, equal to the amount owed under the Note.  According to Borrowers, these insurance payments triggered a release provision in the Deed of Trust, requiring transfer of title to the property back to Borrowers.  The provision cited by Borrowers stated: “Upon payment of all sums secured by this Security Instrument, Lender or Trustee, shall release this Security instrument and mark the Note ‘paid’ and return the Note to Borrower.”  Slip Op. at p. 7.


Defendants removed the case to federal court and moved to dismiss.  The Maryland federal court dismissed with prejudice, and this appeal followed.


As you may recall, a quiet title action under Maryland law provides a vehicle “to protect the owner of legal title from being disturbed in his possession and from being harassed by suits in regard to his title.”  Wathen v. Brown, 429 A.2d 292, 294 (Md. Ct. Spec. App. 1981).  It is well-established that a quiet title action “cannot, as a general rule, be maintained without clear proof of both possession and legal title in the plaintiff.”  Stewart v. May, 73 A. 460, 463-64 (Md. 1909).


Accepting Borrowers’ factual allegations as true, the U.S. Court of Appeals for the Fourth Circuit affirmed the dismissal of the quiet title action, rejecting Borrowers’ argument that the receipt of mortgage insurance benefits triggered any release provision of the Deed of Trust.


Reading the Deed of Trust as a whole, the Fourth Circuit held that, “it is clear that the release provision is triggered only if [Borrowers] satisfy their contractual obligations.”  Slip Op. at p. 7.  According to the Court, as Borrowers conceded that they had not satisfied the Note, the Deed of Trust remained in effect, and Borrowers did not own legal title to their property.


Although Borrowers argued that the Court could only consider claims to the property itself rather than any dispute over an unpaid note, the Court rejected this argument as an attempt to sidestep the requirement that they own legal title to the property.  Notably, the Fourth Circuit observed, “[w]here, as here, a property is encumbered by a deed of trust and its release is conditioned on a party’s performance under a note, determining who holds title to the property necessarily involves determining whether the party has performed under the note.”  Slip Op. at pp. 8-9 (citing Deutsche Bank Nat’l Trust Co. v. Brock, 63 A.3d 40, 48-49 (Md. 2013)).


Likewise, the Fourth Circuit affirmed the district court’s denial of leave to amend.  As the district court properly assumed that the default triggered certain insurance payments, any additional factual information regarding those payments would not have made Borrowers’ quiet title claim any more plausible.


Accordingly, the Fourth Circuit affirmed the district court’s dismissal of the quiet title action with prejudice.






Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
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Admitted to practice law in Illinois



          McGinnis Wutscher Beiramee LLP





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