Thomas Looney of Hackett Feinberg won an appeal at the Massachusetts Appeals Court, which upheld a decision of the Land Court reforming an otherwise-defective mortgage, thereby preserving the client’s collateral for a loan. A copy of the Appeals Court decision, Salem Five Mortgage Company, LLC v. Lester, Docket No. 18-P-470, can be found here.
The lender-client lent the borrower, $300,000 to purchase a home on Nantucket. The loan application and approval all assumed that the borrower would be the sole owner of the property and, therefore, the only signatory on the mortgage. Just before the closing, the borrower requested that his wife be added to the deed making her a co-owner. Unfortunately, that change was never communicated to the lender, and the lender’s then-counsel failed to update the mortgage so as to add the borrower’s wife as a mortgagor. As a result, the lender funded the purchase of the Nantucket property, but only obtained a mortgage from one of the two co-owners. Because of this, the mortgage only encumbered an undivided half interest in the property and was defective for all practical purposes.
The borrower defaulted on the loan and stopped making mortgage payments. The lender then discovered the defect in the mortgage which made foreclosure almost impossible. As a result, the lender filed an action to reform the mortgage so as to deem it to include borrower’s wife as a non-recourse mortgagor. The lender argued, essentially, that without the loan, borrower’s wife would never have acquired her ownership interest in the property, that the lender would never have made the loan unless it believed its mortgage would encumber 100% of the interests in the property, and that the omission of borrower’s wife as a signatory on the mortgage was due to a mistake. As a result, as a matter of fairness, the wife’s ownership interest should be subject to the mortgage.
The case was tried in the Massachusetts Land Court and the lender prevailed. The evidence at the trial fully supported the lender’s claim that the defect in the mortgage was the result of a mistake, and that the lender would never have agreed to make the loan without receiving a mortgage signed by both owners of the property. The trial judge also concluded that borrower’s testimony was not credible and that he misrepresented his intent on the loan application to take title solely in his own name. The Land Court judge ruled that the mortgage should be reformed to add borrower’s wife as a mortgagor. The borrower and his wife appealed that decision to the Massachusetts Appeals Court.
In its decision, the Appeals Court affirmed the Land Court’s judgment. This decision is significant for a number of reasons. First, the case is a reminder that Massachusetts courts have broad powers to reform mortgages and other instruments; even to the extent of subjecting non-borrowers to the terms of a mortgage. Second, the Appeals Court cited the burden of proof used in reformation cases (“full, clear, and decisive proof”) and ruled that the lender in this case proved its case on that standard. While this burden of proof is heavier than the usual standard in civil cases (preponderance of the evidence), this case shows once again that this is not an insurmountable burden. Lastly, the issue of fairness is an important thread throughout the Appeals Court’s decision. In many other cases, the “fairness” issue has been liberally applied in favor of defaulting borrowers against lenders. This case is a welcome reminder that Massachusetts courts will enter judgments based on fairness and equity in favor of lenders when appropriate.
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