N.C. Gen. Stat. § 45-36.6(b) provides that if a secured party erroneously records a release or satisfaction of a security instrument, then the secured party can file a document of rescission that will effectively rescind the release or satisfaction and reinstate the erroneously released instrument. The Court of Appeals of North Carolina recently issued an opinion outlining which mistakes will permit the filing of a document of rescission.
In 1999, husband and wife borrowers obtained financing to purchase a home in Burlington. The loan was secured by a purchase money deed of trust on their house. In March 2004, the borrowers obtained a home equity line of credit from a predecessor of American National Bank that was secured by a second priority deed of trust on their house. In August 2004, the borrowers refinanced their original purchase loan with a loan from Wells Fargo. This loan was secured by a deed of trust. Wells Fargo subsequently entered into a subordination agreement with American National Bank that provided the Wells Fargo deed of trust had priority over the earlier-filed American National Bank equity line deed of trust.
In November 2006, the borrowers again refinanced their loan with Wells Fargo. The parties prepared new loan documents, including a note and deed of trust. The refinance loan documents did not refer to the existing Wells Fargo deed of trust. The proceeds from this refinance were used to immediately repay the 2004 Wells Fargo loan.
In December 2006, Wells Fargo recorded a certificate of satisfaction of the 2004 Wells Fargo deed of trust. Because Wells Fargo did not get a new subordination agreement from American National Bank, the recording of the satisfaction caused the American National Bank equity line deed of trust to take priority over the 2006 Wells Fargo deed of trust. In 2013, Wells Fargo realized its mistake and recorded a document of rescission pursuant to N.C. Gen. Stat. § 45-36.6 to rescind the 2006 satisfaction and reinstate the 2004 Wells Fargo deed of trust. Wells Fargo then sought a declaratory judgment that the 2013 rescission was valid and effectively reinstated the 2004 Wells Fargo deed trust to first priority. The superior court granted judgment in favor of Wells Fargo, finding that the 2013 rescission was properly filed and that Wells Fargo’s 2004 deed of trust had priority over American National Bank’s 2004 equity line deed of trust. American National Bank appealed.
Issues on Appeal
The appeal focused on the interpretation of the phrase “erroneously satisfied of record” as used in N.C. Gen. Stat. § 45-36.6(b). In its appeal, American National Bank argued that this phrase does not permit a rescission for any mistake, but only the erroneous recording of satisfaction for an obligation that actually was not satisfied. Under this interpretation, Wells Fargo could have filed the rescission document only if it could show that, after the borrowers paid off the 2004 loan with the 2006 refinancing proceeds, there was still some outstanding debt secured by the 2004 deed of trust. On the other hand, Wells Fargo argued that the phrase “erroneously satisfied of record” is not so limiting and permits the filing of a document of rescission for an error or mistake of any kind.
On November 1, 2016, a divided Court of Appeals agreed with Wells Fargo. The Court found that the statute itself did not contain any textual limitation on the type of mistake that would allow for the filing of a rescission document. The Court further found that the statute’s legislative history supported Wells Fargo’s interpretation because although the original version of the statute enacted in 2005 contained the limitation suggested by American National Bank, the General Assembly deleted that limiting language when it amended the statute in 2011.
Judge Stroud filed a dissenting opinion. He argued that Wells Fargo’s error was not the filing of the satisfaction of the 2004 deed of trust, but instead its failure to obtain American National Bank’s agreement to subordinate to the 2006 Wells Fargo deed of trust. He also differed from the majority in his view of the 2011 amendments to the statute. Specifically, he believes that the amendments were not intended to apply to all deeds of trust, but only home equity line deeds of trust. Interpreted this way, Wells Fargo’s 2013 rescission would be ineffective.
Given the dissent, the Supreme Court of North Carolina will likely have the final say in this case.
This case illustrates the dangers that lenders face in dealing with refinances and subordinate liens. Any time a lender refinances its own debt and records a new deed of trust, it should not assume that the refinancing deed of trust will simply take the place of (and have the same priority as) its original deed of trust – intervening liens will wipe away priority status. Lenders should also ensure that their deeds of trust contain dragnet clauses that provide the deed of trust secures all present and future advances and future obligations owed by the borrower to the bank.