Can a Lender Rescind Certificate of Satisfaction?

Lender May Rescind Certificate of Satisfaction for Any Reason

Of particular significance for the note-holder or servicer that files a satisfaction of a deed of trust in North Carolina but then discovers the satisfaction was recorded in error: A divided North Carolina Court of Appeals in a case of first impression has held that if the satisfaction was erroneously recorded for any reason, then the recording party may avail itself of N.C.G.S. § 45-36.6(b) and file a notice of rescission, restoring the deed of trust to its prior recorded status. Wells Fargo Bank, N.A. v. American National Bank and Trust Company, No. COA15-689 (N.C.App. November 1, 2016).

In 1999, the homeowners purchased their home with financing from a purchase money loan. In March 2004, they obtained a home equity line of credit from American National secured by a deed of trust.  In August 2004, the homeowners refinanced the purchase money loan with a $350,000 loan from Wells Fargo secured by a deed of trust.  American National subordinated its deed of trust to the Wells Fargo deed of trust.  In November 2006, the homeowners again refinanced with Wells Fargo; however, Wells Fargo did not secure a new subordination agreement with American National.  In December 2006, after closing on the new refinance loan, Wells Fargo recorded a certificate of satisfaction of the 2004 deed of trust the result of which was to elevate the American National deed of trust to a position of priority over the 2006 Wells Fargo deed of trust.  In August 2013, Wells Fargo realized the predicament it had created for itself and recorded a notice rescinding the certificate of satisfaction pursuant to N.C.G.S. § 45-36.6.  It then filed an action seeking a declaratory judgment that its rescission was effective, that its 2004 deed of trust was reinstated, and that it had a first lien on the property.  The trial court granted summary judgment for Wells Fargo.

The majority of the panel of the Court of Appeals held that § 45-36.6 (which permits rescission of a notice of satisfaction for a security instrument if that instrument was “erroneously satisfied”) means that a lender can rescind for an error or mistake of any kind.  Rejecting American National’s argument that the statute only applies if the error was believing that the underlying secured obligation had been paid off when in fact it had not, the Court observed that the original model act upon which § 45-36.6 was based originally supported American National’s interpretation, but the legislature amended the statute removing the language supporting the interpretation urged by American National.

Although the majority found Wells Fargo’s rescission to be effective, it nonetheless reversed the grant of summary judgment in favor of Wells Fargo, holding that genuine issues of material fact still remained as to whether Wells Fargo’s filing of the certificate of satisfaction was, in fact, erroneous or whether it was actually intended.  The dissenting judge suggested that the only “error” was Wells Fargo’s failure to obtain a subordination agreement in 2006.  In his opinion, the evidence before the trial court showed that Wells Fargo did not erroneously release the 2004 deed of trust, rather, by operation of law, once the underlying note was paid off the deed of trust ceased to have any validity and Wells Fargo was obliged to release it, as required by N.C.G.S. § 45-36.9(a).  

There is a reasonable likelihood this case may be headed to the North Carolina Supreme Court given the issues at stake, in which case both sides have arguably persuasive positions.  Whatever the final outcome, hopefully, lenders will benefit from the certainty that an appellate decision usually offers.  Regardless of the eventual outcome, it is obvious that a thorough title examination at the time of the 2006 refinance would have revealed American National’s deed of trust, and a prudent closing agent would have ensured that a new subordination agreement was recorded.

Published by Hutchens Law Firm on December 5, 2016