This month's edition of Tales from the Dirt examines the risk in certifying title with uncanceled deeds of trust.
Commander James T. Kirk had recently retired after a career of military service. He moved back to his hometown, and with his pension and some money he had inherited, he decided to try his hand at real estate development. He found a nice tract of land to buy and subdivide, which he decided to call Enterprise Acres.
The title examination revealed only one problem, an uncanceled deed of trust to Federation Savings Bank. Kirk's attorney contacted the attorney who had closed the previous sale. He was assured that the deed of trust was paid, and he produced a closing statement which showed the deed of trust was to be paid at closing. The closing attorney also offered to give an affidavit that he had tendered payment in full. Kirk's attorney was confident he would be able to get title insurance coverage over the uncanceled mortgage based on this proof and advised Kirk to close as scheduled.
Kirk went forward with the closing, and a couple of weeks later he began implementing his development plans. Nine months later, the property had been subdivided, a plat recorded and roads constructed. Kirk was now ready to begin offering lots for sale. He listed the first section of lots with Sulu Realty, who specialized in subdivision sales. The first phase sold out quickly, and Kirk listed the remainder of the lots for sale. A year later, the trustee of the deed of trust to Federation Savings Bank posted a notice of foreclosure on the land.
As it turned out, the deed of trust had not been paid. The prior closing attorney, Romulus, had embezzled the payoff proceeds and had continued making the monthly payments on the debt. Romulus' expensive lifestyle eventually caught up with him. He could no longer make the payments on all the deeds of trust that he had stolen the payoffs. Kirk confronted his attorney and asked how in the world something like this could happen. "Dang it Jim, I'm an attorney, not a detective!" his attorney exclaimed.
Is there anything Kirk's attorney could have done differently which would have prevented this problem? First, anytime there is an expensive tract of land that does not have a debt on it, a red flag should be raised. In the case at hand, where there was, in fact, an unpaid deed of trust, the attorney should require proof of the payoff with evidence of a canceled check. Even then, there is risk involved because even if the bank cashed the check, they may have not canceled the lien, because there may be other late charges, interest, fees or penalties outstanding. The better practice is to pursue cancelation of the uncanceled instrument. This is also important, because North Carolina is a quasi-title state where beneficial title vests in the trustee. Consider this, if the debt is never discharged from the record, does not title remain vested in the trustee? This presents a separate issue that goes to marketability of title that the seller would be unable to deliver at closing.