Representing an institutional mortgage lender, Thomas Looney of Hackett Feinberg pursued a case for reformation of mortgage. The lender made a loan to an individual borrower, which was secured by a mortgage on the borrower’s family homestead.
At the time of the loan, the lender did not realize (and the lender’s attorney did not notice) that the borrower held only a life estate on the mortgaged property. The borrower’s two adult children had remainder interests, but because the closing lawyer missed the issue, the mortgage was signed only by the life tenant and not by the remaindermen.
The loan proceeds were disbursed to the borrower who used the funds to build a new home on the property, since her old house was in poor condition and beyond repair. The borrower’s children (the remaindermen) were not involved in the loan process, but were aware that she was building a new home and understood that she would need a mortgage loan to pay for the construction.
The lender argued that the mortgage should be reformed so as to encumber the remainder interests in the property as well as the life estate. The primary legal theory in the case was that unless the mortgage were reformed to be made senior to the remainder interests, when the borrower passed away the mortgage would automatically be extinguished (since it only covered the life estate, which would be terminated) and the borrower’s adult children would receive a windfall at the lender’s expense—a free house, unencumbered by any mortgage. To allow that result would create an unjust enrichment for the borrower’s children to the detriment of the lender.
After trial, the Superior Court Judge in Middlesex County agreed with the lender and issued a decision reforming the mortgage. The Judge ruled that the parties to the loan transaction “intended to accomplish a full meaningful, as opposed to grossly deficient, security. They all failed to accomplish this intention, and did so as a result of mutual mistake.” The Court then determined that the proper result was “an equitable mortgage in favor of the lender under a theory of unjust enrichment.” In a comment that shows a correct and refreshing fairness to lenders, the Judge stated that the lender, “(a large corporation) is entitled to the same justice as a natural person….”