Home > Uncategorized > Mistakes in Real Estate Closing Documents: Court Decides Not to Invoke Equity to Save a “Sophisticated Lender” from its Mistake.

Mistakes in Real Estate Closing Documents: Court Decides Not to Invoke Equity to Save a “Sophisticated Lender” from its Mistake.

Mistakes in Real Estate Closing Documents happen. It is a fact.  What are the ramifications?
I will give you  the cliche “lawyer answer” –
It depends.
Among other things, it depends on how significant the mistake is (does it render the lender’s ability to enforce its rights invalid?), and if the lender seeks a Court to “fix” the mistake; how much admissible evidence can be produced to show the Court true intent of the parties.
It may also depend on the sophistication of the party that the lender is dealing with, as demonstrated in a recent Court of Appeals decision.
The Case is Lasalle Bank Midwest NA v Abernathy, No. 304111, 2012 WL 3046137 (Mich Ct App July 26, 2012), app den 493 Mich 940 (2013)
The basic facts are as follows:

In June of 2000, Joel Abernathy (“Joel”) was preapproved for a $145,000 mortgage loan.  Joel made an offer on real estate in St. Clair Shores. After the offer was accepted, Joel applied for a mortgage loan (for which he had been pre-approved) with Standard Federal (“Bank”).

The Bank used a Uniform Residential Loan Application form for that purpose, and identified “JOEL ABERNATHY” as the “Borrower.” It also indicated on that form, however, that title to the property would held in the name of “JOEL ABERNATHY AND CARMEN D. ABERNATHY, HIS WIFE.”

Carmen Abernathy (“Carmen”) did not accompany Joel to apply for the mortgage loan.

The closing on the mortgage occurred at the time of the real estate closing, on December 19, 2000. Joel and Carmen both were present at the closing, which took place at the Bank, along with Bank’s representatives, real estate agents, the prior homeowners, and the title company.

Joel signed a Standard mortgage form that granted Bank a mortgage on the property.
The mortgage form identified the “Borrower” as “JOEL ABERNATHY, A MARRIED PERSON”, was prepared for signature by “JOEL ABERNATHY” as the “BORROWER”, and was prepared for notarization of the signature of “JOEL ABERNATHY, A MARRIED PERSON”.
The mortgage form was not prepared for Carmen’s signature, although the Bank obviously knew that Joel was married to Carmen. Joel signed the mortgage form.  Carmen did not.
At the closing, the sellers then conveyed the property, by Warranty Deed, to “JOEL ABERNATHY AND CARMEN D. ABERNATHY, HIS WIFE”, the identical language to that Bank had used in its Loan Application and mortgage forms. Bank’s “Settlement Statement” form for the real estate closing identified, however, only “JOEL ABERNATHY” as “Borrower”, again consistent with the manner in which the Bank had prepared the mortgage form.
So, just to recap, at the closing, we have a Warranty Deed prepared for Husband and Wife, Mortgage signed by Joel, and a Loan, signed by Joel.
At this point, the Bank doesn’t realize it, but it does not have a valid mortgage.  This is trouble for the Bank.
As time went on, Joel stopped making payments on the mortgage loan.  The Bank attempted to foreclose on the mortgage. However, the Bank can’t foreclose on the mortgage in its current state.
This is because the Bank cannot foreclose on Property that is owned by someone different than the person who signed the mortgage.
Husband and Wife, a distinct legal entity, owns the Property, while the mortgage is only signed by Joel, individually. Those are different legal entities.
The Bank sued for reformation of the mortgage. In essence,  the Bank argued that the Court should change the mortgage with its equitable powers since “we all knew that Carmen was supposed to be listed on the mortgage with Joel, why would we execute a mortgage that was invalid?” or alternatively, “we all knew that Joel was supposed to own the Property in his own name, why would we execute a mortgage that was invalid?”
The Trial Court, after hearing the evidence, granted the Bank’s request to reform the mortgage; the Court basically decided  that since all the parties intended a valid mortgage on the property – the court will reform it.
The Court of Appeals disagreed!
In order to understand why the Court of Appeals disagreed, a discussion of the legal doctrine of “reformation” is necessary.
REFORMATION:
Michigan courts possess the equitable power to “reform an instrument that does not express the true intent of the parties as a result of: fraud, mistake, accident, or surprise.” Lasalle Bank, citing Johnson Family Ltd Partnership v. White Pine Wireless, LLC, 281 Mich.App 364, 371–372; 761 NW2d 353 (2008), citing Scott v. Grow, 301 Mich. 226, 238–239; 3 NW2d254 (1942).
This power to reform an instrument…may be applied to unambiguous documents that nonetheless fail to “express the obvious intention of the parties.” Johnson, 281 Mich.App at 372–373, citing Farabaugh v. Rhode, 305 Mich. 234, 240; 9 NW2d 562 (1943).
The Courts recognize two types of mistakes – Mutual Mistakes and Unilateral Mistakes based on Fraud.
When a party is asking for the Court to reform a document due to a “mutual mistake” – such party has the burden to prove the existence of a mutual mistake “by clear and convincing evidence.”  This is a high burden of proof.
The Court noted that Reformation of a document is appropriate to correct a mutual mistake of fact, or a mistake of the scrivener.
In this case, the Court was not convinced the evidence merited a finding of either a mutual mistake or a unilateral mistake based on fraud.
The Court noted that the Loan Application was prepared by the Bank and signed by Joel,  and clearly indicated that title to the property would be held by Joel and Carmen, husband and wife. “Thus, [the Bank] was on notice at all times that defendants intended to be co-owners of the property, particularly since it was [the Bank] who prepared the Loan application.” Id.
Further, “it was the Bank that dictated who signed which documents at the closing, and that the bank ‘for whatever reason’ directed Carmen that she did not need to sign the mortgage.” Id.
Here is the hard pill to swallow for the lender, the Court further opined that:
“Plaintiff was a sophisticated mortgage lender who had an opportunity to correct any mistake by requiring Carmen to so-sign the mortgage.” “We think it insufficient to invoke equity to save the mortgagee from its won mistake, particularly where the mortgagee is a sophisticated commercial lender.” Id. Citing Townsend, 254 Mich App 140.
Also noteworthy, The Bank petitioned the Michigan Supreme Court for review – the Court denied review on March 4th of this year.
LESSON:
In mistakes that go to the heart of the enforceability of a real estate agreement or mortgage, lenders should take caution in careful execution! A Court has the equitable power to change, or reform a document to conform with the parties true intentions, but it can be a high burden of proof required (clear and convincing evidence). Further, in the event that the borrowers in the transaction are individuals, as opposed to sophisticated commercial mortgagor, the Court may, in reliance on Abernathy and Townsend, hold that a “sophisticated lender” does not deserve a Court’s equitable power.
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