Reconveyance of Paid-Off Liens is Essential

One of the most important steps in a sale or refinance in California that is frequently overlooked, is the recording of a reconveyance of each of the liens after they have been paid.  Many borrowers do not realize that recording a reconveyance of a satisfied lien is essential to clear the title of that lien, and unless a reconveyance is recorded, the lien will show up as unpaid on a future preliminary title report.

I know of a borrower who obtained a hard money loan in 1999, and then refinanced and paid it off with a conventional 30-year bank loan.  Two subsequent refinances were obtained as the interest rates decreased during the 2000-2008 time period without any issues. It was not until a third refinance was made in 2012 that a preliminary title report showed the 1999 lien had never been reconveyed, and it was clouding the title and preventing the refinance over 10 years later.

Fortunately, the escrow officer that handled the 1999 loan was located, and she obtained and recorded a reconveyance.  However, California statutes provide an alternative method to record a reconveyance of a deed of trust, if a title company is willing.

California Civil Code section 2941, subdivision (b)(3) sets forth the procedure by which a title insurance company may prepare and record a release of a mortgage obligation. 

It states: “If a full reconveyance has not been executed and recorded pursuant to either paragraph (1) or (2) [which require the beneficiary and trustee to take steps to reconvey the deed of trust after a mortgage has been satisfied] within 75 calendar days of satisfaction of the obligation, then a title insurance company may prepare and record a release of the obligation. However, at least 10 days prior to the issuance and recording of a full release pursuant to this paragraph, the title insurance company shall mail by first-class mail with postage prepaid, the intention to release the obligation to the trustee, trustor, and beneficiary of record, or their successor in interest of record, at the last known address.

"The release shall set forth:

(i) The name of the beneficiary.

(ii) The name of the trustor.

(iii) The recording reference to the deed of trust.

(iv) A recital that the obligation secured by the deed of trust has been paid in full.

(v) The date and amount of payment.

"The release issued pursuant to this subdivision shall be entitled to recordation and, when recorded, shall be deemed to be the equivalent of a reconveyance of a deed of trust.”

In a recent case, a plaintiff sought damages for a title company's alleged negligence in executing and recording a release of an assigned lien without complying with the provisions of section 2941(b)(3). Plaintiff argued that as the successor to U.S. Bank, the original beneficiary of the deed of trust, Plaintiff was entitled to damages, including attorney’s fees, under section 2941(b)(6), which states, “In addition to any other remedy provide by law, a title insurance company preparing or recording the release of the obligation shall be liable to any party for damages, including attorney’s fees, which any person may sustain by reason of the issuance and recording of the release . . . .”

The title company demurred to the cause of action, arguing that the plaintiff failed to allege that the tort claims included in the cause of action were assigned to plaintiff with the loan and deed of trust. The trial court agreed, and issued an order sustaining the demurrer without leave to amend and dismissing the title company from the case.

Plaintiff argued that the trial court erred, because plaintiff had alleged that the title company had prepared and recorded the release, which represented that the obligation secured by the deed of trust was paid in full, and that the release was to be deemed the equivalent of a reconveyance under section 2941(b)(3)(B).

Plaintiff further alleged that the title company prepared and recorded the release “carelessly, recklessly, negligently, and without authorization from any person having the authority to authorize such act, and without first complying with the provisions of Civil Code § 2941(b)(3).”  Plaintiff contended that the release was void and of no effect, but asked that if the release “had or has the effect of releasing or reconveying” the deed of trust, plaintiff should be awarded damages as authorized by section 2941(b)(6).

The Court of Appeal began with the language of section 2941, which, as a remedial statute, is to be liberally construed to protect all persons coming within its purview.  In view of the broad language of the statute, the appellate court had no difficulty concluding that plaintiff had alleged facts sufficient to state a claim for damages because plaintiff alleged that as a result of the assignment from U.S. Bank, it was the beneficiary of the deed of trust that was released without compliancy with section 2941(b)(3).

Whether U.S. Bank, plaintiff, or anyone else could prove damages against the title company was an open question, which had no bearing on the fact that section 2941(b)(6) imposes broad liability on any title insurance company that issues and records a release under subdivision (b)(3). 

This decision illustrates the importance of obtaining a reconveyance within 75 days after the lien is paid, and not having to rely upon section 2941.  A prudent borrower will insist on receiving a copy of the reconveyance from the escrow company or title company involved in the sale or refinance because only the recording of the reconveyance will clear the title to the real property.