Sutton Funding, LLC v. Jaworski

Citations: 945 N.E.2d 705; 2011 WL 646702Docket: 49A02-1006-MF-709

Court: Indiana Court of Appeals; February 23, 2011; Indiana; State Appellate Court

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In Sutton Funding, LLC v. Janusz Jaworski and First Midwest Bank, the Indiana Court of Appeals addressed a dispute arising from a mortgage refinance. The case involved Sutton Funding, which appealed a summary judgment favoring Jaworski and First Midwest Bank. Key to the appeal was whether Indiana Code section 32-29-6-13 necessitated a release of the mortgage from First Midwest to Sutton Funding. 

The facts reveal that Jaworski had executed a $325,000 promissory note and mortgage in 2004, with maturity extensions altering the final due date to January 19, 2007. In preparation for refinancing, Jaworski's mortgage broker, Hartland, requested a payoff statement from First Midwest, which mistakenly stated a payoff amount of $268,000. Relying on this statement, the refinancing transaction proceeded, with Sutton Funding borrowing $292,050, of which $268,000 was paid to First Midwest.

The court determined that, despite the payoff statement's error, Sutton Funding was entitled to the mortgage release under the applicable Indiana statute, leading to a reversal of the trial court's decision. The court instructed to enter an order for First Midwest to release the mortgage to Sutton Funding and to grant summary judgment in Sutton Funding's favor.

Hartland and Towne and Country believed the 2007 Mortgage refinance would take priority over the previously paid-off 2004 Mortgage, based on a Payoff Statement. First Midwest accepted the refinancing proceeds but did not release the 2004 Mortgage. Instead, it had Jaworski execute a fourth modification to the 2004 Note and Mortgage in April 2007, backdating the documents to January 19, 2007, without notifying Hartland, EquiFirst, or Towne and Country. Jaworski later defaulted on the 2007 Mortgage, prompting Sutton Funding to file for foreclosure against him and First Midwest on August 17, 2007. First Midwest counterclaimed on June 18, 2008, seeking to foreclose the 2004 Mortgage, asserting it still had a valid lien position and that additional amounts were due related to the modifications. It also revealed a previously undisclosed second mortgage debt secured by the 2004 Mortgage concerning an airplane loan. 

The parties engaged in cross-motions for summary judgment, with Sutton Funding arguing for the release of the 2004 Mortgage under Section 13, while First Midwest sought to affirm the priority of the 2004 Mortgage. The trial court ultimately ruled in favor of First Midwest, granting priority to the 2004 Mortgage and including the airplane loan as part of its secured debt. Sutton Funding is now appealing this decision, contending that Section 13 mandates the release of the 2004 Mortgage due to reliance on a misstatement in the payoff statement.

The Payoff Statement contained a misstatement regarding the payoff amount, but the sole legal question pertains to whether the independent closing agent, Towne and Country, relied on it in good faith without knowledge of the error. Both Towne and Country and Hartland submitted affidavits confirming their reliance on the Payoff Statement and stated that had they been aware of the actual circumstances of the 2004 Mortgage, they would not have proceeded with the transaction. First Midwest did not provide evidence contradicting these affidavits but argued that the absence of a formal release request meant Section 13 was not applicable. This argument was dismissed as it prioritizes form over substance, and the lawsuit itself serves as a de facto release request. Additionally, First Midwest claimed the cross-collateralization provision in the 2004 Mortgage should have alerted the agents to potential other debts. However, Hartland's request for a written Payoff Statement was a reasonable action to clarify any doubts, and they were justified in relying on it. First Midwest also pointed out a discrepancy between a Mortgage Verification form and the Payoff Statement amounts, asserting this should have raised suspicion. The ruling emphasized that the purpose of a Payoff Statement is to provide assurance of the total payoff amount, and it is unreasonable to expect the parties to detect errors. First Midwest, being the only party with full knowledge of the mortgage details, made the mistake, and Hartland and Towne and Country were entitled to trust the Payoff Statement without inferring mistakes. The distinction between ‘in good faith’ and ‘non-negligently’ was clarified, with 'good faith' defined as a sincere belief in the legality and honesty of one's actions, regardless of negligence.

Hartland, Towne and Country, and EquiFirst are established to have acted honestly and lawfully, with no evidence suggesting they were aware of any misstatement in the Payoff Statement. Consequently, it is determined as a matter of law that a misstatement occurred, and that Hartland and Towne and Country relied on the Payoff Statement in good faith. Sutton Funding is thus entitled to a release of the 2004 Mortgage under Section 13, and summary judgment is granted in its favor. The trial court's judgment is reversed, and instructions are given to First Midwest to release the 2004 Mortgage to Sutton Funding. While First Midwest points out an alternative statute allowing Towne and Country to record a certificate of release, it is clarified that compliance with this statute is not a prerequisite for the release under Section 13. Nonetheless, First Midwest retains the ability to collect the total amount owed from the debtor, Jaworski.