12.28.17 Use of Incorrect Form of Security Instrument



A common claim results from the failure to use the proper form of security instrument. Of course, in South Carolina , the proper form is a mortgage. Occasionally, a lender will prepare the loan documents and send to the closing attorney a form of security instrument used in another state. For example, a lender in North Carolina may send a deed of trust form for use on South Carolina property. Or, perhaps a Georgia lender will send a form typically used in Georgia , the deed to secure debt. While these instruments are drafted to provide the lender with real estate security in the appropriate jurisdiction, there are very significant differences when these documents are compared to the mortgage form commonly used in South Carolina . Both the North Carolina and Georgia security instruments, for example, provide for foreclosure sales under power of sale. These are non-judicial foreclosures and the terms of the instruments do not provide for judicial foreclosures as required by the South Carolina statutes. Also, the foreign security instrument forms will typically be printed in compliance with that states witnessing and acknowledgment statutes. Therefore, the security instrument may not be acknowledged or probated in compliance with South Carolina law. For example, there may not be the requisite two witnesses on the instrument. 

Upon receipt of such a claim, Stewart Title will typically advise the foreclosure attorney to include in the foreclosure proceeding a cause of action for reforming the security instrument to conform with a mortgage that would be valid under South Carolina law. However, reformation of an instrument will not necessarily be successful, particularly as against a purchaser for value or junior lien holder.  A subsequent purchaser for value or lien creditor may argue that the instrument is invalid. If the instrument is not executed and witnessed in accordance with South Carolina law, the purchaser for value or lien creditor may contend that there is no constructive notice of the security instrument.

If the mortgagor has filed bankruptcy, under Section 544 of the Bankruptcy Code, the Trustee in Bankruptcy is considered a bona fide purchaser and may seek to avoid the insured security instrument.

Use of the improper security instrument is a claim that may be easily avoided if the agent is attentive to the closing documents.