Lenders Have To Do What They Are Told (At Least When It Comes To Accepting Funds To Pay Off A Loan And Cancel A Mortgage)

 by:  Peter J. Gallagher

This was the take home message from a recent Appellate Division opinion — Lakeland Bank v. Sampson. In that case, Lakeland obtained final judgment of foreclosure against its borrower in connection with a home equity line of credit which was secured by a mortgage on the borrower's home.  Lakeland named Bank of America ("BofA") as a defendant to wipe out a mortgage that Bank of America recorded against the same property subsequent to Lakeland's mortgage. BofA never answered the complaint, but moved, on the eve of the sheriff's sale, to cancel the sale and allow it to answer and assert a counterclaim. The trial court granted the motion and allowed the parties to take discovery on the priority of their mortgages. What the discovery revealed is what makes this case interesting and instructive.


As it turned out, when the borrower obtained a $1.5 million loan from BofA, the closing attorney obtained payoff information from Lakeland and, as part of the closing on the BofA loan, sent a check for the payoff amount to Lakeland with instructions to "completely pay and satisfy the Mortgage and Note/Bond that [Lakeland held]" and "return the original Mortgage properly endorsed for cancellation." However, the same day Lakeland received these instructions from the closing attorney, it also received an "Authorization to Reopen Home Equity Line of Credit" from its borrower, which instructed Lakeland not to close the HELOC without prior written authorization from the borrower.  Accordingly, Lakeland applied the proceeds of the check from the closing attorney to zero out the HELOC, but never closed the loan or returned the mortgage for cancellation.  Thereafter, the borrower obtained an additional $800,000 in advances on the HELOC.

After discovery, both Lakeland and BofA moved for summary judgment. The court denied Lakeland's motion and granted BofA's motion. The court held that, when faced with conflicting instructions, Lakeland's "paramount obligation was to the closing attorney who tendered funds subject to explicit directions to pay off the HELOC and cancel the mortgage." If the closing instructions put Lakeland in the position of acting against its customer, the Court held, then Lakeland should have returned the check to the closing attorney or asked the closing attorney for instructions. But, the Court held that BofA was entitled to summary judgment because it advanced funds intended to put it in the first lien position and would not have made the loan if it knew that Lakeland's loan would have remained open and its mortgage would have remained in first position. Ultimately, the Appellate Division ruled that a bank that receives funds for the purpose of satisfying a mortgage debt has an "independent duty" to carry out those instructions.   

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