By Paul Hodnefield, Associate General Counsel for CSC
A secured lender’s risk does not always end when a debtor repays the obligation. State laws often impose an affirmative duty on the secured party to terminate, satisfy or otherwise release its security interest within a specified time period. In some cases, the secured party’s failure to comply can be very costly.
The greatest risk for the secured party arises when the security interest encumbers real estate. The potential cost of non-compliance with satisfaction requirements was recently demonstrated in the case of Regions Bank v. Strawn, 732 S.E.2d 230 (S.C. Ct. App. Aug. 22, 2012).
The debtor, Strawn, granted Regions Bank (the “Bank”) a mortgage on his real property to secure a $50,000 line of credit. Strawn later deeded the property to his wife, who sold it to Borchers (the “Buyer”) in 2003.
At closing, the closing attorney had a check hand delivered to the Bank for the payoff amount of the mortgage. The check had the words “Payoff of first Mortgage” typed on its face. The transmittal letter that accompanied the check stated “PLEASE FORWARD SATISFIED DOCUMENTS (with a copy of this letter) TO THIS OFFICE TO BE REMOVED OF RECORD.”
The Bank accepted the check. However, it never marked the mortgage as satisfied or sent a satisfaction to the closing attorney. In fact, the Bank later issued Strawn checks to draw on the line of credit. Strawn used the checks to run up a debt of almost $73,000.
In early 2006, the Bank filed a foreclosure proceeding against the Buyer. The Buyer answered with a counterclaim against the Bank for failure to satisfy the mortgage within 90 days.
At trial, the court first granted summary judgment in favor of the Buyer on the foreclosure claim. The court reasoned that the Bank was estopped from foreclosing on the property because it should have had the mortgage satisfied of record.
Next, the court addressed the Buyer’s counterclaim. The court found that the closing attorney hand delivered the payoff letter, payoff check and the specific request that the mortgage be satisfied within three months. Therefore, the court held that the Bank violated a state law that required it to satisfy the mortgage within that time. Consequently, the court awarded the buyer $25,000 in statutory penalties, plus costs and attorney’s fees.
The Bank appealed, but the South Carolina Court of Appeals affirmed. The appeals court found that all requisites were in place to trigger the penalties and related relief under the statute. The Buyer fully paid the obligation and requested that the mortgage be satisfied of record. The Bank, for its part, failed to satisfy the mortgage within the statutory time period.
The important thing to take away from this case is that some states impose severe penalties on a secured party that fails to timely record the necessary termination, satisfaction, reconveyance or release following payment of the obligation and demand by the debtor. While mortgage lenders are acutely aware of this risk, many secured lenders that only occasionally take security interests in real estate may not realize the potential exposure. All secured lenders should ensure that they have adequate procedures in place to promptly process any demand for satisfaction of a mortgage following payment of the obligation.
Paul Hodnefield is Associate General Counsel for Corporation Service Company and a frequent speaker/writer on UCC, lien and real property service issues. Please feel free to contact him with questions or comments at firstname.lastname@example.org, or 800-927-9801, ext. 62375.