By Bradford S. Bernstein, Esq.
Settlement attorneys beware. Imagine this situation – you are conducting a refinance transaction, you need to pay off a bank's revolving line of credit, you request and obtain a payoff statement, the proceeds of the new loan are used to "pay off" the revolving line of credit, and you request the bank to record a satisfaction to release the deed of trust securing the line of credit. Unfortunately, the bank does not release its lien. Based on the doctrine of equitable subrogation, the new lender is in first position, right? Wrong!
In Egeli v. Wachovia Bank, N.A., 184 Md.App. 253, 965 A.2d 87 (2009), the Court of Special Appeals held that a lender (SunTrust Bank) did not surrender its lien priority by accepting funds from a bank (Wachovia Bank) that paid the then existing balance of the revolving line of credit, when the mortgagors did not provide authorization to SunTrust Bank to close the line of credit.
Section 3-105.1(c) of the Real Property Article provides:
Procedure for release. – Within a reasonable time after a loan secured by an existing mortgage or deed of trust has been paid in full and there is no further commitment by the holder to make an advance or by the borrower to incur an obligation secured by that mortgage or deed of trust, the holder shall:
(2) Release any recorded mortgage or deed of trust securing the loan.
SunTrust Bank argued that, under the terms of the Equity Line Agreement (the "Agreement") that it had with the mortgagors, it was obligated to advance funds to the mortgagors until 2012 absent the mortgagors' written authorization to close the account, and SunTrust Bank never received that authorization. That continued commitment, argued SunTrust, excused it from releasing its lien notwithstanding its acceptance of Wachovia's payment.
Wachovia argued that SunTrust Bank was equitably estopped from claiming a superior lien priority, and furthermore, its lien was entitled to priority based on the doctrine of equitable subrogation. The doctrine of equitable subrogation provides that "[w]here a lender has advanced money for the purpose of discharging a prior encumbrance in reliance upon obtaining security equivalent to the discharged lien, and his money is so used, the majority and preferable rule is that if he did so in ignorance of junior liens and other interests he will be subrogated to the prior lien." G.E. Capital Mortgage Servs. v. Levenson, 338 Md. 227, 231-32, 657 A.2d 1170 (1995). One of the primary purposes of subrogation is to prevent "the inequity of a party possessing a superior lien accepting payment from a third party without releasing its lien, thus enjoying the benefit of the payment while maintaining a superior lien priority to the payor." Egeli, 184 Md.App. at 266, 965 A.2d at 95.
To counter this argument, SunTrust maintained that the Court should not apply the doctrine of equitable subrogation based on the absence of the mortgagors authorization to close the line of credit. Wachovia, on the other hand, argued that it was unaware of the terms in the Agreement between SunTrust Bank and the mortgagors. While the Court acknowledged this fact, it determined that Wachovia, and the world, were constructively on notice of the terms contained in SunTrust Bank's duly recorded deed of trust. The Court of Special Appeals concluded "that SunTrust Bank's deed of trust provided sufficient notice, especially to a sophisticated party such as Wachovia, that the type of account at issue was an open-ended equity credit account. Consequently, Wachovia, at a minimum, was on notice that there may have been additional requirements to satisfy the terms of the contract creating the account other than mere payment of the balance." Id. at 262, 965 A.2d at 93.
Based on the Court of Special Appeals decision in Egeli, settlement attorneys and lenders must be extra cautious when dealing with a revolving line of credit during a refinance transaction. When trying to pay off such a revolving line of credit, it is critical that you obtain the mortgagors' written authorization to terminate the line of credit account. If such authorization is not obtained, the bank holding the line of credit will retain its lien priority, even it accepts a payment sufficient to payoff the then existing balance.
Bradford S. Bernstein is a principal in the Rockville office of Miles & Stockbridge P.C.