The Court of Appeals took another look at reformation law and handed down a harsh decision that was sure to make Fifth Third Mortgage Company very unhappy in its decision in Fifth Third Mortgage Company v. Alan Miller, et al. In reiterating a long held standard in North Carolina in its decision in Fifth Third, the Court of Appeals ruled that an instrument will not be reformed when such reformation would impair the lien of a third party who is an innocent bona fide purchaser.
The facts of Fifth Third are as follows. Alan Miller executed and delivered a promissory note to Fifth Third on March 20, 2007. Simultaneously therewith, Mr. Miller also executed a deed of trust that was for the benefit of Fifth Third and that was supposed to secure the Fifth Third Note with property located at 9911 Strike the Gold Lane, Waxhaw, North Carolina. Unfortunately for Fifth Third, the drafter of the Deed of Trust did not name a trustee and did not properly describe the property. Despite these errors, the Fifth Third Deed of Trust was recorded on March 21, 2007.
On June 11, 2007, Mr. and Mrs. Miller entered into an equity line agreement and Deed of Trust with BB&T. The BB&T Deed of Trsut secured the equity line agreement with the Strike the Gold Lane Property. The BB&T Deed of Trust was recorded on June 25, 2007.
Mr. and Mrs. Miller defaulted on the Fifth Third Note and the BB&T Equity Line Agreement. After BB&T commenced foreclosure proceedings of the BB&T Deed of Trust, Fifth Third filed an action seeking the following relief: (i) reformation of the Fifth Third of Deed of trust, (ii) declaratory judgment, (iii) quiet title, (iv) judicial sale, and (v) monetary judgment. Noticeably missing from the relief sought in the Fifth Third Complaint is a claim for constructive trust.
As part of its appeal, Fifth Third tried to argue that reformation was proper because BB&T was not a bona fide purchaser. In support of this argument, Fifth Third cited affidavits and discovery responses that apparently show that BB&T had knowledge of the Fifth Third Deed of Trust at the time the BB&T Equity Line Agreement was executed. Fifth Third also cited the fact that the correct street address for the Strike the Gold Lane Property was included on the Fifth Third Deed of Trust.
The Court of Appeals did not bite on Fifth Thirds argument. Instead, the Court of Appeals ruled that “[a] deed of trust containing a defective description of the subject property is a defective deed of trust and provides no notice, actual or constructive, under our recordation statutes.” In doing so, the Court of Appeals made clear that reformation will not hinder the rights of a bona fide purchaser (or bona fide lienholder) if that purchaser does not have record notice as provided by the North Carolina Recordation statutes. In essence, the Court of Appeals ruled that actual knowledge means nothing in a reformation action that is predicated on the recordation statutes.
This case is a harsh outcome for Fifth Third, or more likely their title insurer. However, it is possible the outcome could have been avoided. In Arnette v. Morgan, 88 N.C. App. 458, 363 S.E.2d 678 (1988), the North Carolina Court of Appeals recognized that constructive trusts do not fall within the recording statutes. The import of this rule is that the strict outcomes necessitated by the recordation statutes can be avoided.
Consequently a grantor of land who retains land that he or she had intended to convey but for a mistake will hold the land in a constructive trust for the intended grantee when consideration is exchanged for the conveyance. When the constructive trust is present, the grantee of the ineffective instrument is entitled to reformation, even if there is a third party lienholder, unless the third party lienholder can show that (i) they did not have notice of the conveyance that went wrong and (ii) they in good faith advanced new consideration or incurred some new liability on the faith of the apparent ownership of the grantor.
If constructive trust were raised in this case, it is unlikely that BB&T would have been able to stave off the reformation. The evidence of actual notice that Fifth Third advanced in its reformation argument would likely have been enough to provide the notice required under constructive trust. Hind sight is always 20-20, but I think the Fifth Third case would have come out differently if the constructive trust claim would have been brought.
The facts of Fifth Third are as follows. Alan Miller executed and delivered a promissory note to Fifth Third on March 20, 2007. Simultaneously therewith, Mr. Miller also executed a deed of trust that was for the benefit of Fifth Third and that was supposed to secure the Fifth Third Note with property located at 9911 Strike the Gold Lane, Waxhaw, North Carolina. Unfortunately for Fifth Third, the drafter of the Deed of Trust did not name a trustee and did not properly describe the property. Despite these errors, the Fifth Third Deed of Trust was recorded on March 21, 2007.
On June 11, 2007, Mr. and Mrs. Miller entered into an equity line agreement and Deed of Trust with BB&T. The BB&T Deed of Trsut secured the equity line agreement with the Strike the Gold Lane Property. The BB&T Deed of Trust was recorded on June 25, 2007.
Mr. and Mrs. Miller defaulted on the Fifth Third Note and the BB&T Equity Line Agreement. After BB&T commenced foreclosure proceedings of the BB&T Deed of Trust, Fifth Third filed an action seeking the following relief: (i) reformation of the Fifth Third of Deed of trust, (ii) declaratory judgment, (iii) quiet title, (iv) judicial sale, and (v) monetary judgment. Noticeably missing from the relief sought in the Fifth Third Complaint is a claim for constructive trust.
As part of its appeal, Fifth Third tried to argue that reformation was proper because BB&T was not a bona fide purchaser. In support of this argument, Fifth Third cited affidavits and discovery responses that apparently show that BB&T had knowledge of the Fifth Third Deed of Trust at the time the BB&T Equity Line Agreement was executed. Fifth Third also cited the fact that the correct street address for the Strike the Gold Lane Property was included on the Fifth Third Deed of Trust.
The Court of Appeals did not bite on Fifth Thirds argument. Instead, the Court of Appeals ruled that “[a] deed of trust containing a defective description of the subject property is a defective deed of trust and provides no notice, actual or constructive, under our recordation statutes.” In doing so, the Court of Appeals made clear that reformation will not hinder the rights of a bona fide purchaser (or bona fide lienholder) if that purchaser does not have record notice as provided by the North Carolina Recordation statutes. In essence, the Court of Appeals ruled that actual knowledge means nothing in a reformation action that is predicated on the recordation statutes.
This case is a harsh outcome for Fifth Third, or more likely their title insurer. However, it is possible the outcome could have been avoided. In Arnette v. Morgan, 88 N.C. App. 458, 363 S.E.2d 678 (1988), the North Carolina Court of Appeals recognized that constructive trusts do not fall within the recording statutes. The import of this rule is that the strict outcomes necessitated by the recordation statutes can be avoided.
Consequently a grantor of land who retains land that he or she had intended to convey but for a mistake will hold the land in a constructive trust for the intended grantee when consideration is exchanged for the conveyance. When the constructive trust is present, the grantee of the ineffective instrument is entitled to reformation, even if there is a third party lienholder, unless the third party lienholder can show that (i) they did not have notice of the conveyance that went wrong and (ii) they in good faith advanced new consideration or incurred some new liability on the faith of the apparent ownership of the grantor.
If constructive trust were raised in this case, it is unlikely that BB&T would have been able to stave off the reformation. The evidence of actual notice that Fifth Third advanced in its reformation argument would likely have been enough to provide the notice required under constructive trust. Hind sight is always 20-20, but I think the Fifth Third case would have come out differently if the constructive trust claim would have been brought.
This case proves instructive for anyone bringing a reformation action in North Carolina. Don't forget about constructive trust!
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