Tennessee Supreme Court Rules Against Reformation if there are Parties with Intervening Interests
Updated: Aug 2, 2021
In August of 2020, despite the world limping along due to COVID-19, the Tennessee Supreme Court continued to hear cases, albeit virtually. A case was heard that impacts the real estate law world and I wanted to dig deeper into its implications.
At issue in Scott Trent et al. v. Mountain Commerce Bank et al., No. E2018-01874-SC-R11-CV, is whether equitable reformation should be a remedy in curing a title defect when such remedy would benefit a party with constructive notice of the defect and harm the rights of a creditor or creditor with recorded judgment liens and also no knowledge of the title defect.
In this case, Mr. and Mrs. Greene were facing foreclosure on a large real estate investment deal that was in default. They asked an attorney to prepare Quit Claim Deeds of their other property over to a Limited Partnership of which they were parties. The attorney drafted several Quit Claim Deeds but one of the Quit Claim Deeds was missing a conveyance from Mrs. Greene (let's call that specific property 123 Blackacre). According to the facts presented in the case, the Greene's did not review the Quit Claim Deeds before signing them. Shortly thereafter the investment property was foreclosed upon and a judgment was entered against the Greene's.
A few years after the foreclosure the Limited Partnership sold 123 Blackacre to the Trent's. About a year later the Trent's learned of the missing conveyance from Mrs. Greene to the Limited Partnership and the recorded judgment. The Trent's and the Greene's worked together to have a corrected Quit Claim Deed recorded and made sure that it explained the error.
The Trent's then filed suit against the banks that obtained the judgment against the Greene's. They put forth in their argument to the court that the court should determine that the corrected quit claim deed reformed the incorrectly filed quit claim deed and thus removed the judgment lien from attaching to the property. The lower courts determined that there was no mistake made and thus the "reformed" quit claim deed did not remove the judgment from attaching to 123 Blackacre.
The Supreme Court of Tennessee agreed to hear the appeal of the case. The court upheld the rulings of the lower court and agreed that the "reformed" Quit Claim Deed was not sufficient to resolve the issues as the Trent's would have liked.
Let's look deeper at the legal analysis that helped the court make its decision.
Tenants By the Entirety:
First the court looked at how the Greene's took ownership of the property and the Quit Claim at issue. The Greene's took ownership as Tenants by the Entirety. In Tennessee only a married couple can own as Tenants by the Entirety. This protects the marital interest of both parties, but as the Court stated in Bryant v. Bryant, is also "based on the concept that those who are married are not separate persons, but one". This court case goes further to state that after one spouse dies the surviving spouse then owns the property outright, they do not acquire any new interest because they have always had a full ownership interest.
Due to the Greene's taking in this manner, the Court then reasoned that when Mr. Greene signed the Quit Claim Deed in the later transaction, he could not convey away Mrs. Greene's ownership interest. The Court held in Robinson v. Troudale County, that "one spouse can convey only his or her survivorship interest without the other spouse's consent, and any unilateral attempt will be void at the insistence of the spouse and any future purchaser or mortgagee" will be in for a nasty surprise. With this logic the Court made it clear that Mr. Greene was only able to convey away his survivorship interest and nothing more.
Attachment of Liens:
The Court then moved on to look at how this impacted the judgment liens that were taken against Mrs. Greene. The Court reasoned that as her interest had not been altered, then the liens attached against her interest upon being recorded.
Tennessee Code Annotated Section 25-5-101(b)(1) states that "Judgments obtained in any court of record in the State of Tennessee shall be liens upon the debtor's land from the time a certified copy of the judgment shall be registered in the lien book of the Register's office of the county where the land is located."
The Code goes further in Section 66-26-101 to state that judgments shall be effective between the parties to the lawsuit without needing to be recorded, but if not recorded those judgments will not have effect on others. In other words, if someone obtains a judgment and does not record it, then the person who has the judgment against them could sell their home without the judgment holder finding out and getting paid, but because the lien was not recorded the parties to the sale would have not jeopardized the sale.
The Court looks finally at Reformation and whether they have the right to reform and, if so, if they should reform the Deed. The Court first points out that under Tennessee law it does have the right to reform a document to correctly reflect the parties agreement. The Court held in Lane v. Spriggs that reformation is an equitable remedy that allows "courts to correct a mistake in a writing so that it fully and accurately reflects the agreement of the parties." The most abundant mistake found in a contract is a mutual mistake which means that the mistake occurred on both sides of the transaction.
The standard for reforming a contract due to mutual mistake must show "by clear and convincing evidence" the following: (1) that the parties reached a prior agreement regarding some aspect of the bargain; (2) that they intended the prior agreement to be included in the written contract; (3) that the written contract materially differs from the prior agreement; and (4) that the variation between the prior agreement and the written contract is not the result of gross negligence on the part of the party seeking reformation. Sikor v. Vanderploeg.
The Greene's had every opportunity to review the documents before signing them, thus allowing them to go back and reform the deeds at such a later point, the court reasons, would put others at an unfair disadvantage and hurt their rights. The flip side of this is that the court does leave open the ability to reform a deed if no parties are harmed, quoting from Minton v. Long, stating that reformation will not be granted "if it affects intervening rights of third person who actually and justifiably rely upon recorded instruments."
In the end, the ruling of the Court also allowed the Court to refrain from making a ruling as to whether reformation should be an available remedy to fix a quit claim deed by adding an omitted grantor.
The lesson here is to be careful of how you draft things and always double check whatever you are signing your name to. Or as the Court says in this case, "Equity does not permit us to correct a mistake that could have been avoided with reasonable diligence."
If you feel that this information may help you or a client, please reach out. It is my mission to help others.
Jeremiah L. McGuire