A recent Louisiana Fifth Circuit Court of Appeal decision has brought to our attention a long-established, but perhaps not as well known, exception to the public records doctrine.
The public records doctrine is a critical principle of Louisiana law. The public records doctrine provides that an instrument affecting immovable (real) property is only effective against third persons from the time that it is filed for registry in the parish where the property is located. See Louisiana Civil Code articles 517, 1839, and 3338. This rule is a negative doctrine in that it negates the effectiveness of unrecorded instruments. With this rule, a third party can trust that the recorded acts of transfer or encumbrances in the public records are the only ones affecting the property, and rely on the absence of any other documents from the public record that may negatively impact the property.
The public records doctrine is of particular importance to those in the real estate and banking industry because prospective third party purchasers and lenders can rely upon the public records in verifying the current owner of immovable property and whether there are any mortgages or liens that affect the property. The prospective purchaser wants to ensure that he is purchasing the property from the proper party free and clear of any liens, and the lender wants to ensure that there are no liens affecting the property that will prime its mortgage. While a useful tool, the doctrine is not without exception. A recent Louisiana Fifth Circuit Court of Appeal decision has brought to our attention a long-established, but perhaps not as well known, exception to the public records doctrine. That exception provides that a mortgage cancelled through fraud, error or mistake, without the consent or knowledge of the holder, does not deprive the holder of its security, even as against third parties dealing with the property in good faith in reliance upon the public records. Neeb v. Graffagnino, No. 13-687, 2014 La. App. LEXIS 487 (La. App. 5 Cir. 02/26/14).
The court in Neeb relied on the foregoing exception to the public records doctrine in upholding the validity of a lien and privilege in favor an attorney on property recovered by judgment. The attorney and client entered into a contingency fee agreement which was recorded in the local mortgage and conveyance records. The client was able to obtain a district court order cancelling the fee agreement, which order of cancellation was subsequently nullified by the district court but not before the property was conveyed to a third party purchaser. The Louisiana Fifth Circuit Court of Appeal affirmed the district court decision declaring the lien and privilege in favor of the attorney valid and holding that the property was acquired by the third party purchaser subject to that lien.
While the court in Neeb addressed a rather unique type of privilege granted by a contingency fee agreement, the fraudulent and erroneous cancellation exception to the public records doctrine has significant potential impact with regard to cancelled conventional mortgages. In examining the mortgage records to determine whether or not the property is free and clear of liens, a title examiner verifies that any mortgages that may have been filed have subsequently been cancelled of record by the local clerk of court. Typically, creditors request that their mortgages be cancelled by the local clerk of court upon satisfaction of the debt secured by the mortgage. Third party examiners rely on these cancellations to determine if the property is free and clear of any encumbrances. Lenders or other interested third parties may also request, and often rely upon, a mortgage certificate issued by a Louisiana clerk of court certifying whether there are any liens affecting specified immovable property within the jurisdiction of that clerk of court. As a result of the liability that can result from the issuance of an erroneous mortgage certificate, Louisiana’s various statutes mandating the procedures and forms for cancellation of mortgages generally either provide that the act of cancellation is required to contain a provision that the clerk shall not be liable for damages resulting from the cancellation or contain an indemnity for any liability that the clerks may incur in erroneously cancelling a mortgage upon acceptance of an unauthorized or fraudulent act. See La. R.S. 9:5166, et seq.
One of the cases cited by the court in Neeb for the fraudulent and erroneous cancellation exception to the public records doctrine was a case that directly addressed the fraudulent cancellation of a mortgage. InNational Acceptance Company of America v. Wallace,194 So.2d 194 (La. App. 2 Cir. 1967), the district court ordered the cancellation of a mortgage, and the property previously encumbered by the cancelled mortgage was sold to a third party purchaser. The holder of the note secured by the cancelled mortgage then sued the mortgagor, the third party purchaser, and the clerk of court seeking recognition of the mortgage The Louisiana Second Circuit Court of Appeal found that the proceeding leading to the order directing the cancellation was without the knowledge or consent of the holder of the note secured by the mortgage and ruled that the mortgage be recognized and maintained, that there be judgment against the mortgagor in the amount of the note secured by the mortgage, and that the property be seized and sold. In arriving at its decision, the court relied upon the fraudulent cancellation exception to the public records doctrine.
There are huge consequences to an unauthorized or fraudulent cancellation as a result of this exception to the public records doctrine. A mortgage that is relied upon as cancelled could be later deemed to be effective against third parties if cancelled by fraud, error or mistake, without the consent or knowledge of the holder. A purchaser of property that was purportedly purchased free of liens and encumbrances could find its property subject to a lien that could result in the seizure of its property by an unknown third party creditor. Further, a lender believing to have a first mortgage lien could find its mortgage cancelled by a foreclosure of a prior mortgage believed to have been cancelled.
Property owners and lenders who incur damages resulting from the revival of a previously cancelled mortgage are not without recourse. Anyone who requests the cancellation of a recorded mortgage and who knew or should have known that the act of release or request for cancellation that results in the mortgage cancellation contained false or incorrect statements is personally liable to and shall indemnify both the recorder of mortgages and any person relying upon the cancellation for any damages suffered as a consequence of such reliance. La. R.S. 9:5174.
As added protection, purchasers and lenders typically purchase title insurance to insure against defects in or liens or encumbrances to title. It has long been a strongly advised practice to have attorneys for purchasers and lenders conduct an examination of the public records in order to verify ownership and identify any existing encumbrances to title. While title examinations are also part of the due diligence for title insurance policies in order to identify any mortgages or liens that must be cancelled or identify title issues that must be listed as exceptions to coverage, this due diligence cannot guard against an erroneous or fraudulent cancellation of a lien that could be retroactively resurrected. Instead, title insurance policies can provide insurance against risks such as this exception to the public records doctrine that cannot be identified by an examination of the public records. The recent application of this exception to the public records doctrine reminds us of the importance of title insurance in real estate transactions.