We see it all the time — an investor bought a property that seemed like a sweet deal, but turned out to have a mortgage on it from a prior owner. No wonder it was so cheap! The investor calls me up and asks me what we can do about it.
Let’s set aside the fraud claim against the guy who talked you into a quitclaim deed for fast cash because other investors are waiting (but keep that in mind because there might be something there, especially if your seller was the one who the liens were filed against).
Can’t we just file a Quiet Title lawsuit and get rid of the mortgage? Not so fast–this is not ‘Nam, this is bowling. There are rules. The court will not just let you extinguish someone’s debt just because they didn’t check their mail for a while. But it is possible. To understand it, let’s start with what we’re asking the court to do.
What is a quiet title lawsuit?
There are many elements of property rights besides just ownership of the land — land can have leases, easements, mineral rights, rights of entry, mortgages, mechanic’s liens and on and on. All of these property rights, whether recorded or not, make up the “title” to real estate. To “quiet” the title to real estate literally means to determine exactly who has what rights with respect to a given piece of property. When file a quiet title lawsuit, we are asking the court to determine these rights as they were at time of the filing of the lawsuit.
Who to serve
In order for the court to make an informed decision about the title to real estate, all of the potential interest-holders must be given an opportunity to prove what rights in the real estate they’re entitled to. To facilitate this, most courts require the plaintiff to obtain a preliminary judicial report, which is essentially a title insurance policy that lays out the owner of record and any other mortgages, liens, or encumbrances of record like easements, restrictions, or leases. From the judicial report, we can tell who we need to sue. In the complaint, we will ask all of those potential interest-holders to come before the court and present their claims against the title of the real estate.
What to ask for
This where the tricky part is. In order to use a quiet title lawsuit to remove a mortgage from a property, we have to claim that the mortgage is invalid. There are a few ways to do this:
- Claim that the mortgage itself is so defective that it doesn’t give proper notice of its existence
- Claim that the underlying debt is paid or satisfied
- Claim that the lender can’t collect on the debt
If we’re the subsequent purchaser of the property, we have a bit of an evidence problem here. Most courts will tell us that a subsequent purchaser doesn’t have standing to challenge the enforceability of the note because we didn’t sign it. There are a few counterarguments that may be presented to overcome this assumption.
If we’re dealing with an old “zombie” mortgage that’s been in default for many years without collection activity, we may be able to claim that we think the debt is paid because we haven’t received anything from the lender for some time and there has been no collection activity. This happens often when lenders get acquired or go out of business–the paperwork simply gets lost. If there have been several sales of the property or mortgages since, that’s good evidence that the mortgage is paid but not released.
The easiest way to get rid of the mortgage lien is to challenge its validity on its face–that is, something in the document makes it totally invalid. If the borrower on the mortgage didn’t own the property at the date of its execution, that’s great news for us. If the mortgage doesn’t adequately identify the property it applies to, that’s also grounds for invalidity.
I say “adequately” because technical errors don’t count here — if a reasonable person can tell from the text of the document what it’s supposed to attach to, it’s generally going to be fine. However, other technical errors, like a lack of a notary stamp, are usually not enough to defeat the mortgage. The point of this document is to provide notice of the existence of a debt attaching to the property — and if it accomplishes this, it’s good enough.
As with any lawsuit, if you can present enough evidence that the court can hang its hat on, it will probably grant your wish, unless the lender shows up and presents evidence to prove you wrong. However, if you can only make bare, unsupported allegations, a court will be hesitant to simply throw out a lien.
Quiet title lawsuits are not simple machines for removing liens. It requires some evidence-gathering and a presentation of a good case. A good outcome will likely come if we expect the lender not to show up and defend its interest.