You Discover a Missing Closing Document—Let Sleeping Dogs Lie?

Pop quiz: You work for a title company. During a routine audit of your closed files you discover that a lien release is missing from a deal that closed a few years ago. Without the lien release your customer’s house remains subject to a lien granted by the residential developer who sold the lot to your customer. Do you (a) request a lien waiver to make sure things are in order or (b) let sleeping dogs lie?

I’m not going to tell you what I would do, but a recent case decided by the Missouri Court of Appeals (Melson v. Traxler) dealt with just such a scenario. After discovering the mistake, the title company sent a lien release to the lien holders and asked them to sign it. Unfortunately for the title company and its customer, the developer that had granted the lien in the first place was in default under the promissory note that the lien secured. With security for an overdue loan unexpectedly showing up on their doorstep, the lien holders refused to grant a lien release and instead threatened to foreclose on the homeowners’ property.

The homeowners and their bank sued to block the foreclosure, arguing that the lien holders had an obligation to release the lien, based on arguments involving course of performance and contract modification. Although the trial court agreed and granted summary judgment to the homeowners and their bank, the appeals court reversed the judgment.

The court of appeals held that the language of the deed of trust securing the developer’s loan was unambiguous and that the deed of trust did not require the lien holders to grant partial deeds of release when lots were sold. The plaintiffs argued that although the contract language was not ambiguous, the lien holders’ practice of releasing liens lot by lot as they were sold modified the deed of trust to impose an unwritten requirement on the lien holders to release the lien that encumbered the plaintiffs’ lot.

Although the court of appeals noted that there is authority that a party’s course of performance may be admissible to prove that a contract has been modified, it looked to Leggett v. Missouri State Life Insurance Co., 342 S.W.2d 833, 877 (Mo. 1960) as support for its ruling that the lien holders’ practice of releasing liens encumbering lots as they were sold did not modify the deed of trust at issue.  In Leggett, the Missouri Supreme Court held that “[a]cts done by the parties to a contract after its making, tending to show an interpretation by them or by one of them at variance with the plain terms written in the contract, will not control; but the contract is to be construed as written.” The Missouri Court of Appeals stated, “Though this precedent is more than fifty years old, it has not been overruled or materially modified and is binding on us” and reversed the trial court’s ruling.

So what would you do if you were the title company? Would you be proactive and try to fix the past mistake? Or would you let sleeping dogs lie and hope for the best?