So Who Get’s The Payoff Check?


1 February, 2007


Mortgage Lender and Servicer Alerts

This sounds like a non-issue. When someone is paying off your mortgage (assuming you are the mortgage holder or servicer) the check goes to you.  True enough, but that is not our perspective here.  Rather, the scenario which catches our attention (and should capture yours) is this.  There is a mortgage upon a certain property.  The owner is selling and the prospective purchaser comes to you for financing. Or, an owner approaches you to refinance a property, as part of which transaction an existing mortgage is to be satisfied.

At the closing you send proceeds of your loan sufficient to satisfy that first mortgage, right?  Usually, but there can be a serious complication and a recent case offers a stern warning about necessary care. [See First National of North America v. Nations Credit, 305 A.D.2d 536, 762 N.Y.S.2d 414 (2d Dept. 2003)].  (It also says something important about mortgage servicing.)

Here in a nutshell are the essential case facts and the vital lesson they afford.

Borrower buys a house and obtains a mortgage from Morning Star which a year later assigns the mortgage to First National.  Although First National is now the owner and holder of the mortgage, it writes to borrower advising that account questions, including payoff inquiries, should be directed to Morning Star (the original mortgagee).

Borrower later sells the property to buyer who gives a mortgage to American Business Credit which pays off the first mortgage by sending a substantial payoff check to Morning Star.  So far, no apparent problem.  It is alleged, though, that Morning Star’s president embezzled the payoff funds – at least these monies never went to First National.

When First National became aware that the new owner was remitting mortgage payments to American Business Credit (with First National left out the proverbial cold) First National started an action to, in essence, establish the existence and seniority of its mortgage.  American Business Credit opposed on the ground that Morning Star had what in legalese is referred to as apparent authority to accept a payoff on behalf of First National so that First National’s mortgage should be deemed satisfied.

An appeal level court found, however, that when American Business Credit paid Morning Star, it did not demonstrate fulfillment of its duty to conduct a reasonable inquiry into the scope of Morning Star’s supposed authority.

While in the end this became a fact issue to be decided at a trial (and who needs that), the point for lenders is that they cannot blindly rely upon letters or suggestions about who gets a payoff check.  There has to be some level of genuine or reasonable inquiry.  Absent that inquiry, it may suffer continued existence of a senior mortgage which should have been paid off but wasn’t.

Mr. Bergman, author of the four-volume treatise, Bergman on New York Mortgage Foreclosures, LexisNexis Matthew Bender (rev. 2017), is a partner with Berkman, Henoch, Peterson, Peddy & Fenchel, P.C. in Garden City, New York. He is also a member of the USFN, The American College of Real Estate Lawyers, The American College of Mortgage Attorneys, an adviser to the New York Times on foreclosure issues and writes a regular servicing column for the New York Law Journal. He is AV rated by Martindale-Hubbell, his biography appears in Who’s Who In American Law and he has been for years listed in Best Lawyers In America and New York Super Lawyers.