Colonial Capital Corp. v. Smith

Court of Civil Appeals of Alabama
367 So.2d 490 (1979)

ELI5:

Rule of Law:

A mortgage that has been fully paid, although remaining unsatisfied of record, is not a valid, legal, or subsisting encumbrance and therefore does not constitute a breach of the covenant against encumbrances in a warranty deed.

Facts:

In 1969, a mortgage was placed on a piece of real estate.
On August 22, 1973, Colonial Capital Corporation sold this property to Dallas Wayne Smith and Phyllis Smith, conveying it via a warranty deed.
Prior to this sale, the 1969 mortgage had been paid in full, but it was never formally marked as satisfied in the public mortgage records.
The Smiths took possession and remained on the property without issue for several years.
On or about June 8, 1977, the Smiths entered into an agreement to sell the property to a prospective purchaser.
During a title examination, the prospective purchaser's attorney discovered the unsatisfied 1969 mortgage in the public records.
Despite being informed by Colonial Capital that the mortgage was paid, the prospective purchaser refused to complete the sale due to the unsatisfied record.
Colonial Capital subsequently obtained a formal affidavit of satisfaction for the mortgage.

Procedural Posture:

Dallas Wayne Smith and Phyllis Smith (plaintiffs) filed suit against Colonial Capital Corporation (defendant) in a trial court, alleging a breach of warranty.
The trial court granted summary judgment in favor of the Smiths on the issue of liability.
The issue of damages was then tried before a jury.
The jury returned a verdict in favor of the Smiths and against Colonial Capital for $1,750.
Colonial Capital Corporation appealed the judgment to the Court of Civil Appeals of Alabama.

Premium Content

Subscribe to Lexplug to view the complete brief

You're viewing a preview with Rule of Law, Facts, and Procedural Posture

Issue:

Does a mortgage that has been fully paid but remains unsatisfied of record constitute a breach of the covenant against encumbrances in a warranty deed?

Opinions:

Majority - Wright, Presiding Judge

No, a mortgage that has been paid but remains unsatisfied of record does not breach the covenant against encumbrances. The court reasoned that the five covenants in a warranty deed protect against actual defects in title, not mere administrative errors in public records. The covenant against encumbrances is only breached if an alleged encumbrance is valid, legal, and subsisting. A mortgage that has been factually paid in full is no longer a valid or subsisting claim against the property, even if the record has not been formally cleared. Therefore, it cannot diminish the value of the estate conveyed and does not constitute a breach of the covenant. As the Smiths' possession was never disturbed, no other covenants were breached.

Analysis:

This decision clarifies the legal definition of an 'encumbrance' for the purposes of warranty deed covenants, establishing that substance prevails over form. It holds that the actual validity of a claim against property, not its mere appearance in public records, is determinative of a breach. This precedent protects sellers from liability for clerical errors or administrative oversights that do not represent a genuine, enforceable cloud on title. Future cases involving alleged breaches of the covenant against encumbrances will require an inquiry into whether the claim is legally and factually subsisting, rather than simply relying on the face of public records.

Gunnerbot

AI-powered case assistant

Loaded: Colonial Capital Corp. v. Smith (1979)

Try: "What was the holding?" or "Explain the dissent"