From the November, 2001 issue of The Title Insurance Law Newsletter
A lender that paid off the borrower's equity loan but did not close the account is not entitled to the equity lender's priority, according to an Indiana court. The priority dispute was between the two lenders, and did not involve an intervening lienholder.
Steven and Teena Morris went to Liberty Mortgage Corp., Inc. to refinance a $35,000 revolving line of credit loan given by National City Bank. The payoff letter advised that the loan account would not be closed unless the borrowers did so in writing. The title company that closed the loan sent in a $33,000 payoff check that was short a few days' interest, and no letter closing the account. A year later, after the Morrises tapped the National City loan for another $33,000, they defaulted on both loans and filed bankruptcy.
Liberty argued that National City was obligated to release its lien because it had been paid in full. The court rejected that theory because the borrowers had not closed the account. It found the check marked "NCB of KY Payoff" not to be a sufficient notice.
Liberty also argued that it stood in National City's lien priority position as to the amount of the payoff by Liberty. The court might have shortcut its analysis by finding that the doctrine of equitable subrogation does not work as a weapon against the very lender who was paid off. Instead, it held that Liberty could not get the benefit of the rule because Indiana bars a lender guilty of "culpable negligence."
Liberty, or at a minimum, its closing agent had actual knowledge of National City's prior recorded mortgage lien and was notified that a signed statement from the Morrises was necessary to close the account which the mortgage secured. Liberty therefore had the ability to avert harm by simply procuring such a statement from the Morrises when it submitted payment to pay off the account. It failed to do so. Accordingly, Liberty acted with culpable negligence.
Liberty Mortgage Corp., Inc. v. National City Bank, ___ N.E.2d ___, 2001 WL 1047414 (Ind.App.).
