Introduction
Loan servicers often receive payments on open-end home equity lines of credit (“HELOC”) that pay the balance down to $0.  Sometimes that is because the borrower intends to pay off the loan through a refinancing or sale of the property. Other times, it is because the borrower is using the HELOC as intended: paying it down and then later taking a new draw. If the borrower intends to pay off the loan but does not direct the servicer to close the HELOC, disputes arise between the original lender and the new lender. For example, a less-than-honest borrower who intended to pay off the loan may realize that he can continue to borrow on the HELOC.  This invariably leads to litigation between the original lender and new lender.

Even though this appears to happen on a relatively regular basis, no published California decision has yet to address whether paying down a HELOC to zero automatically gives rise to either a statutory or an equitable duty on the part of the original lender to reconvey the deed of trust. At least one California Superior Court, however, recently found that the servicer for the original lender had no such duty.

In what appears to be a matter of first impression under California law, the San Bernardino County Superior Court entered summary judgment in favor of Macquarie Mortgages USA, Inc. (“Macquarie”) in a case involving the interplay between California’s statutory scheme for reconveyance of deeds of trust upon “satisfaction” and HELOCs.[1]

The Court ruled that Macquarie had no obligation to reconvey a deed of trust securing a HELOC when Macquarie received what amounted to payment in full from a refinancing lender. Under the facts of that case, the Court determined that the HELOC had not been “satisfied” because the borrower and refinancing lender failed to comply with the requirement — which the refinancing lender was aware of from multiple sources — that the borrower provide the servicer written instruction to terminate the HELOC as a prerequisite to reconveyance. The Court also ruled that even if a statutory duty to reconvey had otherwise existed, the refinancing lender’s recovery, which was premised upon equitable claims, was barred on the equitable grounds of laches and unclean hands.

Background
In March of 2005, the borrower executed a HELOC agreement secured by a first lien deed of trust on his home. The HELOC agreement expressly provided that for the creditor to treat the HELOC as terminated prior to its maturity date, the borrower must instruct the creditor in writing to terminate the HELOC. Moreover, the deed of trust provided that the creditor was obligated to reconvey the deed of trust only upon the termination of the HELOC agreement in accordance with its terms.

Later that same year, the borrower decided to refinance the HELOC. To determine the outstanding balance of the HELOC, the refinancing lender’s sub-escrow agent — a title company — requested several “payoff demand statements” pursuant to California Civil Code Section 2943. Each statement the servicer sent in response to those requests explicitly noted that the borrower needed to authorize the termination of the HELOC in writing in order for Macquarie to terminate the HELOC. The facts showed that the borrower never provided that authorization.

The refinancing lender was also aware of the HELOC’s written termination requirement from a collateral source — the title company the refinancing lender used to issue it a title insurance policy. Indeed, the title company’s preliminary title commitment noted the “special payoff requirements” for the HELOC, including that “Borrower provide authorization to freeze the line of credit.”

The title company ultimately wired funds to Macquarie, bringing the balance of the HELOC to zero. 

The facts showed, however, that the refinancing lender never requested that the borrower terminate the HELOC — in fact, the borrower never requested termination of the line of credit and instead continued to utilize it.

Five years later, after the borrower had gone into default on both the HELOC and the refinancing lender’s loan, the refinancing lender contended that it had “discovered” that Macquarie had not reconveyed its deed of trust on the property. When Macquarie refused to reconvey its deed of trust, the refinancing lender brought suit, alleging various equitable causes of action designed to put its deed of trust in first position and/or to cancel or reconvey Macquarie’s deed of trust. Ultimately, the two main legal issues were: (1) whether Macquarie had a duty to reconvey its deed of trust; and (2) whether equity would compel granting the refinancing lender first priority position on the property with respect to its deed of trust.

No Duty to Reconvey Exists
The refinancing lender argued that Macquarie had a statutory duty to reconvey its deed of trust upon receipt of funds bringing the balance of the HELOC to zero, on the theory that the zero balance signified the deed of trust had been “satisfied.” The refinancing lender relied on California Civil Code Section 2941, which provides in pertinent part that:

“Within 30 calendar days after the obligation secured by any deed of trust has been satisfied, the beneficiary or the assignee of the beneficiary shall execute and deliver to the trustee the original note, deed of trust, request for a full reconveyance, and other documents as may be necessary to reconvey, or cause to be reconveyed, the deed of trust."

The statute does not distinguish between traditional loans and revolving lines of credit, and no reported California cases have yet to address whether paying down a home equity line of credit to zero automatically gives rise to a statutory duty under California law to reconvey a deed of trust securing a home equity line of credit. The distinction between loans and lines of credit, however, proved critical. While a loan is a fixed sum paid back over time with interest, a line of credit allows a borrower the right to draw on and pay down the line of credit over a set period of time. In fact, under the terms of a HELOC agreement, a borrower may pay down the balance to zero, thereby avoiding interest payments while still retaining the right to draw down against the HELOC in the future.

Ultimately, the Court determined that Macquarie was not obligated to reconvey its deed because the deed of trust had not been satisfied. The refinancing lender knew that termination of the HELOC required the borrower’s written authorization by way of both (1) the payoff quotes, which explicitly stated that requirement; and (2) the preliminary title commitment issued by the title company. 

Given the ongoing nature of the HELOC and the refinancing lender’s failure to “satisfy” the conditions to terminate it, no reconveyance obligation arose under Civil Code Section 2941 or otherwise.[2]

Equity Bars Recovery
Even if Macquarie otherwise had an obligation to reconvey its deed of trust upon receipt of funds bringing the balance of the HELOC to zero, the Court further ruled that the refinancing lender was barred from recovering on any of its equitable claims based on, among other things, the equitable defense of laches. In making this determination, the Court found persuasive a Maryland appellate case entitled Egeli v. Wachovia Bank, N.A., 965 A.2d 87 (Md. Ct. Spec. App. 2009). In Egeli, the court determined that the terms of the original lender’s deed of trust provided sufficient notice to the refinancing lender that the type of account at issue was a HELOC and that there may have been additional requirements — although not explicitly stated — necessary to satisfy the terms of the HELOC other than mere payment. As such, the refinancing lender’s subjective intent to refinance the line of credit was irrelevant. The court also ruled that the refinancing lender’s failure to provide the original lender with a written request to close the HELOC — a contractual requirement for closing the line of credit that the refinancing lender should have been aware of upon learning that the loan was a line of credit — combined with the refinancing lender’s prejudicial delay in bringing suit, barred the refinancing lender’s equitable claims.[3] Though Egeli had no precedential value, the Court found its facts “strikingly similar” and its logic “compelling” in the absence of California authority on the issue.

In Egeli and in Macquarie’s case, the refinancing lender intended to discharge the obligation owed to the first lien holder. In both cases, however, the senior deed of trust secured a HELOC and not a traditional home loan, and the refinancing lender failed to meet the requirements for full “satisfaction” of the line of credit. 

But the equitable case for Macquarie was even stronger than for the lender in Egeli. The refinancing lender had waited five years to bring suit against Macquarie, as opposed to three years in the Egeli case, a classic example of laches. Also, the home equity lender in Egeli never explicitly advised the refinancing lender that the HELOC required a written request to terminate it, a fact that the refinancing lender in this case had actual knowledge of from multiple sources. The equities thus clearly favored Macquarie.

Conclusion
Despite commonality of the issue raised, no published case has yet to address whether paying down a home equity line of credit to zero automatically gives rise to either a statutory or an equitable duty under California law to reconvey the deed of trust at issue. One California Superior Court, however, has now answered that question in the negative.

Notes:

[1] The case is entitled Deutsche Bank National Trust Company, as Trustee v. Macquarie Mortgages USA, Inc. et al., San Bernardino County Superior Court Case No. CIVRS1104882.

[2] The refinancing lender also argued that a reconveyance obligation arose under Civil Code Section 2943. Section 2943 allows a refinancing lender, among others, to rely on a payoff demand statement “in accordance with its terms” for full satisfaction of obligations secured by the deed of trust at issue, and further provides that any sums due and owing but not included in payoff statements become an unsecured obligation of the borrower. The statute, however, does not address reconveyance, and the “unsecured” penalty did not apply because Macquarie had not misstated the sums due at the time. Further, Macquarie’s payoff quotes explicitly provided that the Borrower had to provide written consent to terminate the HELOC before Macquarie could close the HELOC (which consent was never provided), meaning that the refinancing lender did not comply with the payoff quotes “in accordance with [their] terms” as required by Section 2943.

[3] The Egeli case was decided in part on a Maryland statute that provides that: “[w]ithin a reasonable time after a loan secured by an existing mortgage or deed of trust has been paid in full and there is no further commitment by the holder to make an advance or by the borrower to incur an obligation secured by that mortgage or deed of trust, the holder shall:… (2) Release any recorded mortgage or deed of trust securing the loan.” Macquarie took the position that the term “satisfied” in the context of Section 2941 is the functional equivalent of the language of the Maryland statute.