Posting for

Monday, September 20, 1998

by: Bert Rush

brush@firstam.com

CREDIT LINES/RELEASES TO COME/ESCROW AND CLOSING

Our recent discussions of difficulties encountered in attempting to pay off and terminate credit lines has taken a new turn, at least for me.

LandSakes savants will recall that in the last few weeks we reported a possible pattern (in California and elsewhere) of paid-off credit line lenders refusing to provide promised releases or reconveyances, and instead allowing their credit lines to remain open--threatening priority of our newly insured lenders.

This prompted us to re-visit the Goldome case, a 1989 decision of a New Jersey court of appeal, which held that a paid-off credit line lender had not only the right but the obligation to keep its line open--and make funds available to its borrower--where requirements for termination of the line (as provided in its loan agreement and/or credit line mortgage) were not fully satisfied in connection with an attempted payoff.

I thought we had reached a consensus that where credit lines were being paid off or refinanced our employees and agents should at least be obtaining borrowers' written instructions for the existing lender to freeze the line of credit, terminate the loan accout upon payoff, and release the credit line mortgage.

Then from New Hampshire Carol Brooks was heard to say we should also be collecting and destroying credit cards and credit line checks.

Meanwhile, David Dickson (Memphis) wrote of a claim he's now handling wherein our agent obtained borrowers' signatures on the credit line lender's standard form request-for-termination letter--but failed to complete the form by filling in the borrowers' names (signatures were illegible), loan account number, and statement that credit cards and/or checks had been surrendered at closing.

David has now provided more details about this claim --First Tennessee Bank refuses to release its prior mortgage not only because the request-for-termination does not include the loan account number, but also because the borrowers' credit cards and checks have not been destroyed. Here are excerpts from a letter received from counsel for First Tennessee Bank:

Not surprisingly, the debtors remained in possession of the credit cards and/or checks for this account and began using them, resulting in the balance now owing. The account was simply not terminated in accordance with the terms of the agreement. I also refer you to (Tenn. Code Anno.) sec. 47-22-202, which sets forth the requirements of termination of credit cards by cardholder, including surrender to the issuer of all cards in the cardholder's possession or control. The requirements of law were not met either."

Don't know if anyone (other than Carol Brooks, perhaps) saw this coming--I certainly didn't.

As a practical matter, I don't think our employees or agents should be expected to read and interpret loan agreements and/or credit line mortgages to devine what it should take to achieve termination. We naturally expect lenders to tell us what's required.

And when the existing lender speaks, we need to pay close attention to every detail of what they require. Don't leave blanks on their requst-for-termination forms. Provide whatever they want or, if in doubt, inquire of them further. Try to nail down the precise items or info needed to get that release.

I don't know if this causes anyone to re-think the desireability of using endorsement language (Rick Garlick's suggestion) or trust language (my suggestion), but in light of the hardball game we're in with some lenders it may be worthwhile....

At a minimum, it seems to me that escrow and closing personnel should now be more diligent than ever in following up to obtain "releases to come," and where they encounter resistance let in-house counsel know immediately. The names and practices of these lenders should then be made known to all those on the "front lines" in your state or region.

And, as said before, state and regional counsel should be writing letters and calling upon lenders involved to make sure their senior managers are aware of our concerns.

I consider this one of the most serious risks for potential future claims we are now facing--right up there with injudicious removal of the creditors' rights exclusion --and the perennial risk of defalcations.

Questions, comment, argument? Just press the "reply" button....

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Following Monday's posting, Dennis Gonski (outside counsel in New Jersey) writes:

...please note that Goldome was not a New Jersey Appellate decision.

Goldome was a trial court decision by Judge Diana, 236 N.J. Super 118, 564 A.2d 463 (Ch. Div. 1989).

Nevertheless, Goldome is a fair statement of the law in New Jersey.

Reply to Dennis: Thanks for the input--it's often hard for me to tell a court's jurisdiction. The thing that impresses me about Goldome is that the reasoning is very sound--and I think will be followed by courts in other states, whether they cite the case or not--but its result may come as a surprise to us title folk, and escrow and closing folk. It's the old story of being so focused on your task that you tend to lose sight of the viewpoint of the "other side." We should definitely keep it in mind when planning for training.

I may have received other replies recently which I inadvertantly deleted--an unfortunate episode of keyboard chaos. If anyone sent anything pithy which hasn't been posted please feel free to re-send....