Clean Title Search Defeats Foreclosure
Anyone who practices in the land title field has heard the old (unfunny) joke about the timely-recorded junior mortgage that primes a later-recorded senior mortgage. A recent case out of Rockland County Supreme Court adds a new punch-line.
In Capital Stack Fund, LLC v. Badio, et al., 2012 NY Slip Op 51481(U) (Sup. Ct., Rockland Cty., July 15, 2012), Capital Stack Fund, the senior lender, had refinanced an earlier mortgage, which was satisfied soon after the new loan closed. For some reason, Capital Stack’s mortgage was not recorded for several months. In the interim, Colin, the junior lender, closed its loan and recorded its mortgage. Capital Stack sought to foreclose and named Colin as a defendant. Of course, Colin asserted priority under RPL §291. Capital Stack countered, inter alia, that Colin was on constructive notice of Capital Stack’s loan because of the recorded satisfaction (i.e., that the earlier mortgage could not have been satisfied but for the existence of an intervening loan and mortgage, albeit unrecorded).
In connection with the mortgage transaction, Colin’s real estate counsel “hired the title company to search the title, and obtained title insurance for [Colin]....” The title company “did not convey to [Colin] or their lawyer any information about the recently-satisfied ... Mortgage.” Colin submitted an expert witness affidavit from a third-party title agency principal stating that "extraneous information that does not reveal the existence of any open title encumbrance against real property, such as mortgages that have already been satisfied, ... is not turned over to a title company's client" [emphasis in original]. Capital Stack submitted no affidavit to the contrary.
Based on this testimony, the Court found that “by doing a title search and acquiring title insurance, [Colin] did make a ‘reasonably diligent inquiry’ into whether they should ‘question the transaction,’ ... . They should not be charged with constructive notice of [Capital Stack Fund’s] later-recorded mortgage.” Capital Stack Fund’s foreclosure action was dismissed!
The Court sidestepped the delicate question of whether a recorded satisfaction, in and of itself, is sufficient to constitute constructive (or at least “inquiry”) notice of the existence of an unrecorded mortgage. Constructive notice arises merely from the properly recorded instrument, regardless of whether the public records are actually searched.
The decision also blurs the distinction between a search and report prepared for the client’s use and information on the one hand, and a search performed by the insurer for its own use in making underwriting decisions on the other. Read literally, it says that the title search made in connection with writing the title policy was done by Colin, or on their behalf. The more likely scenario is that the title company was engaged to provide a lender’s policy and conducted the title search for its own benefit before preparing a “commitment.” The expert testimony made clear that the satisfaction was discovered of record, but not turned over to the client. This approach is consistent with underwriting practice.
Nevertheless, the Court appears to hold that a title company search and issuance of insurance is per se sufficient to shield a lender from constructive notice that might otherwise be imputed to the lender from the public record itself.