Daily Development for Wednesday, January 31, 2001

By: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
prandolph@cctr.umkc.edu

TRUSTS; REFORMATION; MISTAKE: Beneficiaries of trust are not bound by a mortgage entered into by trustee as an individual, rather than in his capacity as trustee, notwithstanding the fact that the trustee had the power to mortgage the trust property, where beneficiaries had no knowledge of transaction and did not subsequently ratify trustee's actions.

Norwest Bank Minnesota, N.A. v. Ode, 615 N.W.2d 91 (Minn. Ct. App. 2000).

The trustee was the father of the beneficiaries and the son of the trustor. He had the power to transfer and mortgage the trust property. In fact he had already mortgaged the property once in his individual capacity, using the money for his individual purposes, and had defaulted on that mortgage. The mortgagee had foreclosed, and the time was rapidly approaching for the termination of the statutory redemption period following that foreclosure. The trustee was trying frantically to borrow the money to carry out the redemption. He had arranged for a mortgage loan with a local mortgage broker but the title company, as a condition of insuring the mortgagee, required a deed from the trustee as trustee to the trustee as individual and a copy of the trust so that the title insurer could be confident that the transfer was consistent with the trust. This never happened, but the mortgage broker made the loan anyway, taking a mortgage from the trustee in his individual capacity, and a few days later sold it upstream. Subsequently, it tried to get the trustee to sign a deed from himself as trustee to himself as an individual, and he refused.

Subsequently, the holder of the note brought suit to reform the mortgage to establish that it was made by the trustee in his capacity as trustee, apparently arguing that it believed that this was the trustee's intent. The trial court granted reformation.

On appeal: Held: Reversed.

The appeals court held that the execution of a note and mortgage encumbering trust property by the trustee of the trust in his capacity as an individual, rather than in his capacity as trustee, could not be a "mutual mistake" where mortgagee and trustee knew that the proceeds of the loan were for the benefit of the trustee personally and not for the beneficiaries of the trust."

Further, the acceptance of the mortgage from the trustee in his individual capacity did not constitute a "unilateral mistake" by mortgagee accompanied by fraud or inequitable conduct by the trustee where mortgagee's title insurance company had warned that a trustee's deed was necessary before trust property could provide security for mortgage, and mortgagee agreed to go forward without obtaining such documentation. Rather, it appeared that the mortgagee was wilfully blind to the transparent uncertainties in this deal,

Comment: There's no question that there was a mistake here. The mortgagee thought it was getting valid mortgage, and it didn't. But that's not sufficient grounds to deprive the beneficiaries of their property. The mortgagee had to have a good faith belief that the trustee had the power to encumber the property, and the parties simply made a mistake in carrying out that purpose. That didn't happen here. As indicated, the mortgagee ignored important information that might have forced the trustee to divulge the fact that he lacked the power that he was claiming.

There must have been evidence at trial regarding assurances and other representations made by the trustee to the mortgagee. The appeals court doesn't list any of that, but something must have influenced the trial court to grant reformation. We're not even sure that the trustee wouldn't have gone further with the fraud, executed the necessary documents, and produced a trust giving him general powers, had he been pressed to do so. But the court concludes it doesn't have to account for that, since the mortgagee is seeking equitable intervention, and must show that it behaved in an equitable manner. It didn't. It was careless. Te mortgagee should have known better, and gets no equitable relief.

The lesson is painfully obvious one dispenses with formalisms in dealing with a trustee at one's peril.

Readers are urged to respond, comment, and argue with the daily development or the editor's comments about it.

Items in the Daily Development section generally are extracted from the Quarterly Report on Developments in Real Estate Law, published by the ABA Section on Real Property, Probate & Trust Law. Subscriptions to the Quarterly Report are available to Section members only. The cost is nominal. For the last six years, these Reports have been collated, updated, indexed and bound into an Annual Survey of Developments in Real Estate Law, volumes 1‑6, published by the ABA Press. The Annual Survey volumes are available for sale to the public. For the Report or the Survey, contact Maria Tabor at the ABA. (312) 988 5590 or mtabor@staff.abanet.org

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