Title Insurance Client Alert - June 2023

Kaufman & Canoles

Kaufman & Canoles

Recent Virginia Circuit Court Opinion Holds Deed of Trust Cannot be Modified or Subsequently Enforced After Secured Negotiable Instrument has been Paid in Full

Recently, the Circuit Court of Arlington County, Virginia, issued an important decision involving the modification and enforcement of deeds of trust. In Mahaley v. Metters, CL21002581-00/01, 2023 Va. Cir. LEXIS 80 (Arlington Cty. May 25, 2023), the Court held that a deed of trust which was “modified” subsequent to its underlying negotiable instrument being paid in full, was a nullity and thus unenforceable.

The case involves a recorded deed of trust against Plaintiff Mahaley’s real estate, which had been recorded prior to his purchase. The deed of trust was not brought to Mahaley’s attention prior to his purchase of the real estate.  His intention was to purchase the property free and clear of any lien. Following Mahaley’s purchase, the beneficiary of the deed of trust, Primis, which was the successor-in-interest to Sonabank, proceeded to commence a foreclosure against Mahaley’s interest, and Mahaley sought a release of the deed of trust, a permanent injunction against foreclosure, and a personal judgment against co-defendant Metters.

In 2008, Defendant Metters executed two separate promissory notes in favor of Sonabank. The first was a term loan for $2,000,000 (the “Term Loan”), which was secured by a deed of trust recorded in 2008 against real property in Arlington. The second was an unsecured credit line for $2,500,000, modified to $5,000,000 (the “Credit Line”).  In 2012, Metters drew on the Credit Line to pay off the remaining balance of the Term Loan. However, after the balance of the Term Loan was paid in full, Sonabank filed a so-called “modification” to the Term Loan deed of trust, representing a modification to secure the Term Loan of $2,000,000. In the margins of the deed of trust, Sonabank noted that it was securing the Term Loan, which was “blatantly false.” Sonabank used the ineffectual Term Loan deed of trust to secure a completely different unsecured loan.

By using the existing deed of trust to secure a separate credit line loan, Sonabank avoided paying approximately $10,000 in statutorily required recordation tax on the Credit Line money. The Court held Sonabank thereby willfully misrepresented a material fact to the Clerk of the Court. Further, the Court held that on May 10, 2012, when the Term Loan was paid in full, it ceased to exist as an enforceable instrument, and its deed of trust should have been released. Thus, the May 22, 2012 “modification” deed of trust was a nullity, void ab initio, because there was no underlying instrument to secure. The Court refused to condone the willfully fraudulent conduct that avoided rendering taxes to the Commonwealth. Therefore, the Court held Primis could not benefit from the deceit of its predecessor Sonabank by enforcing the “modified” deed of trust. The Court thus released the deed of trust and permanently enjoined its enforcement.

The Court found no credible evidence that the Metters understood the Sonabank transaction, nor that the Metters were aware that the Clerk of Court was deceived by the transaction by Sonabank.

This significant opinion clarifies that a deed of trust must be released once its secured negotiable instrument is paid in full and illustrates the drastic effects of failing to do so.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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