The Cost Of A Mistaken Recording!

Washington State's recording system is designed to make it easy for the public to see who owns what interests in real estate. When someone conveys an interest in real estate, the conveyance is generally effective upon delivery of the document embodying the conveyance. However, if you want that conveyance to be binding upon future grantees or lienholders, you should record the conveyance with the local county auditor/recorder's office. At the time of recording, the auditor's office assigns a recording number to the document, and also enters information from the document into a searchable index, including data regarding the grantor, the grantee, the type of document, and the legal description of the affected property. Once a conveyance is recorded, it is deemed to give notice to the whole world, regardless of whether a member of the public has actual knowledge of it. This legal concept is known as "constructive notice," meaning that we generally ignore the question of whether anyone actually knew about the document. Recordation protects the beneficiary of the conveyance from the possibility that someone in the future either purchases or encumbers the property, and claiming a higher priority interest.

When you record a document, it is critical to make sure that you mean to do so. A mistaken recording can have costly consequences, as demonstrated in a recent unpublished decision from Division II of the Washington State Court of Appeals, Bank of New York Mellon v. Edwards. There, an owner of property, Edwards, had a mortgage on it which fell into arrears. The bank's mortgage was secured by a deed of trust against the property. After the owner filed for bankruptcy, the bankruptcy discharged the debtor from personal liability, but the deed of trust remained enforceable. In 2015, the bank commenced a judicial foreclosure against the property, but the case stayed dormant for several years before the trial court eventually dismissed the case for lack of action by the bank. In the meantime, in 2016, the bank mistakenly recorded a reconveyance of its deed of trust, releasing its security interest in the property, although the unpaid debt was still well over $300,000. Edwards called the loan servicer to confirm that the reconveyance was intentional, and the servicer confirmed it was. Roughly 5 years later, in 2021, the bank recorded a document claiming to rescind its reconveyance, and the bank filed a new lawsuit asking the court to reinstate the mistakenly reconveyed deed of trust with the same priority it would have had as if had never been released. The trial court granted Edwards' motion for summary judgment, apparently holding that the bank was stuck with no security interest in the property because it had released its interest. Edwards then sought attorneys' fees based upon a fee provision in the released deed of trust, which allowed the lender to recoup its fees incurred in enforcing the deed of trust. However, the trial court denied Edwards' motion for attorneys' fees, holding that the bank's claim was "not brought to construe or enforce the terms of the deed of trust."

The Court of Appeals reversed the trial court on the fees issue. The Court first noted that in Washington, contracts providing for only one party to receive its attorneys' fees in the event of litigation (known as "one-sided attorney fee provisions") are by law deemed reciprocal, under RCW 4.84.330. Second, the Court held that because the deed of trust was central to the dispute, the fee provision was applicable, meaning that Edwards was entitled to an award of his attorneys' fees against the bank. The net results of the ruling were that the bank not only lost its ability to recoup any of the outstanding balance previously secured by its deed of trust, but also the bank was liable for the borrower's attorneys' fees incurred in connection with the bank's failed attempt at reinstating its mistakenly reconveyed deed of trust. This is a harsh lesson, and teaches us that recordation of documents is a serious matter. A party preparing to record a document which either conveys or releases an interest in real estate should be extra careful to make sure the document says what they mean it to say.

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