When Two Innocents Are the Victims of a Third Party’s Fraudulent Mortgage Satisfaction

In a recent unpublished opinion (Deutsche Bank v. Ferguson), the North Carolina Court of Appeals weighed in on the following question:  Who prevails when a scammer fraudulently cancels a deed of trust—the innocent lender whose deed of trust was canceled without its knowledge or the innocent bona fide purchaser who purchased the real estate for value?  

Here were the facts:  In March 2006, Mr. Ferguson purchased real estate in Wake Forest, North Carolina for $227,000.  Deutsche Bank (the “Bank”) financed most of the purchase price and secured its loan with a deed of trust.  The property was part of an HOA whose dues Mr. Ferguson failed to pay.  In February 2015, the HOA foreclosed on the property and was the high bidder at its own sale.  The HOA (which then owned the property subject to the Bank’s deed of trust) then sold the property for a nominal amount to an entity controlled by Xavier Earquhart (the scammer).  That same day, Earquhart fraudulently recorded a Satisfaction of Security Instrument which purported to cancel the Bank’s deed of trust.  Of course, Earquhart was in no way associated with the Bank which had no knowledge of the fraudulent cancellation.  Earquhart was later convicted for his role in this fraud scheme.  In March 2015, an entity controlled by Earquhart sold the property to Colfin AH-North Carolina 2, LLC (“Colfin”) for $181,000.00.  Colfin was apparently unaware that the satisfaction of the Bank’s deed of trust was fraudulent.  In August 2015, the Bank received a title report which showed the HOA’s foreclosure.  In June 2016, Colfin conveyed the property to its affiliate, CSH 2016-1 Borrower, LLC (“CSH”) for no consideration.  

In July 2017, the Bank filed a lawsuit seeking declaratory judgment that its deed of trust continued to encumber the property.  The trial court granted the Bank’s motion for summary judgment on all claims, and CSH timely appealed.  The North Carolina Court of Appeals affirmed.

Citing to established case law, the Court of Appeals began its analysis by holding that “the discharge of a perfected mortgage by the unauthorized act of a third party entitles the mortgagee to restoration of its priority status, even over an innocent purchaser or mortgagee for value.”  The Court of Appeals recognized, however, that if the mortgagee is responsible for the mortgage being released of record, as when the entry of satisfaction is made possible by its own neglect, the mortgagee will not be permitted to establish the priority of its lien to the detriment of a subsequent innocent purchaser.

Here, CSH conceded that the Bank had no role in the cancellation of its deed of trust.  Nonetheless, CSH contended that the Bank should still lose priority over CSH because the Bank was negligent by (a) not discovering the fraud sooner and (b) not foreclosing sooner.  The Court of Appeals, however, noted that the Bank owed no duty to CSH to foreclose within any particular time. Besides, the court noted, there is no precedent to suggest that a mortgagee can lose priority except where it has been negligent in the release of its lien.  Here, the court found no evidence at all that the Bank was negligent in the release of its lien.

The holding of this case is not groundbreaking.  But this case does serve as a reminder to lenders to be wary of fraudulent mortgage satisfaction schemes, and to take immediate legal action when they discover that their mortgage or deed of trust was fraudulently satisfied.