[DIRT] DD 2/19/10 Faulty foreclosure sells one property when two were intended. What to do?

Daily Development for Friday, February 19, 2010
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Husch Blackwell Sanders
Kansas City, Missouri
dirt@umkc.edu


MORTGAGES; FORECLOSURE; SALE; RESISSION: While a corrective deed may not be used to convey additional, separate properties erroneously excluded from an original trustee's deed in a foreclosure sale, courts may consider extrinsic evidence to rescind the conveyance on the basis of mutual mistake if enforcement of the original conveyance would result in a windfall to the mortgagor not contemplated by the parties.

Myriad Properties, Inc. v. LaSalle Bank National Association, ___ S.W.3d ___ (Tex. 2009).

Myrad Properties, Inc. ("Myrad") financed two apartment complexes for $1.05 million. When it obtained the loan, Myrad executed one promissory note in favor of LaSalle Bank National Association's predecessor ("Lender"), which was secured by a deed of trust covering both properties. The deed of trust provided that upon default, Lender could sell the property through non-judicial foreclosure. After Myrad defaulted, LaSalle (as Lender's successor) directed the designated trustees to foreclose. In accordance with Texas law, the trustees posted notice of the sale. However, the property description in the exhibit to the notice only referenced one of the two properties described in the deed of trust.

At the auction, the trustees read only the legal description for the property referenced in the notice (the "Casa Grande Property"), but unspecifically referred to the other property described in the deed of trust. LaSalle made the sole bid of $978,000, and the trustees issued a deed to LaSalle in which the "property" was defined as "the real property described in Exhibit A," which again included only the Casa Grande Property. LaSalle recorded the trustee's deed.

After LaSalle discovered the error and attempted to file a correction deed, Myrad sought a temporary restraining order to prohibit the filing. After a hearing, the district court dissolved an initial order and LaSalle filed the correction deed. Myrad then brought a quiet title action, asking the court to declare that LaSalle owned only the Casa Grande Property, and that Myrad owned the other property free and clear. In response, LaSalle sought a declaration that it held title to both properties, or in the alternative, sought rescission of the trustees' conveyance to LaSalle. The trial court granted final judgment to LaSalle on the issue of property ownership, declaring that the sale resulted in the conveyance of both properties to LaSalle. The court of appeals affirmed the relevant portion of the trial court's judgment.

On the resulting appeal, the Texas Supreme Court first discussed the circumstances in which correction deeds are typically allowed under Texas law, such as to correct facial defects or imperfections in the title. For instance, Texas courts have allowed the use of correction deeds to correct (1) an improper acreage description, (2) an inaccurate metes and bounds description, and (3) a defective description of the grantor's capacity.

The court distinguished those situations from situations where the use of a correction deed would be inappropriate. The latter situations mentioned by the court included the use of correction deeds to (1) convey an additional, separate parcel of land, (2) convey a mineral interest in an additional tract from a separate survey where the first deed mistakenly conveyed only an interest in a separate tract, (3) release and convey additional lots not covered by a vendor's lien, and (4) change the fractional interest of a mineral estate or change a mineral interest to a royalty interest.

When analyzing these cases in the context of the facts in the subject case, the court expressed concern about using correction deeds to convey additional, separate properties not described in the original deeds, noting that doing so "would introduce unwarranted and unnecessary confusion, distrust, and expense into the Texas real property records system." Specifically, "it could require those who must rely on such records to look beyond the deed and research the circumstances of ownership to make sure that no conveyance mistake such as [the one in the subject case] was made, undermining the entire purpose of record notice."

Accordingly, the court held that the correction deed purporting to convey both properties was void as a matter of law.  However, with respect to LaSalle's other argument that the conveyance should be rescinded on the basis of mistake, the court was more receptive. Courts "may consider extrinsic evidence of intent [when] determining whether to enforce a deed," and when that extrinsic evidence discloses that the parties to an agreement "have contracted under a misconception or ignorance of a material fact, the agreement will be voided."

When courts decide whether mutual mistake exists, they employ an objective standard. Here, the court was not "blind to the equities of [the] dispute," and recognized that the enforcement of the original trustees' deed would result in a windfall to Myrad. "While a correction deed may not be used to correct a mistake of omitting an entire second property . . ., all the evidence indicates a mutual mistake in the [trustees'] deed, contrary to the clear intent of the grantor and grantee.

Comment: This is not an unusual problem, but the editor was surprised at the outcome reached below, which found that a sale of one property resulted in a deed for two.  The rescission mechanism makes a lot more sense, although one can expect that occasionally the court will look skeptically at evidence of mistake when a bank sells to itself.  But we know that banks have made a few mistakes lately, and probably will again. . .
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