Real Property – Deed of Trust – Reformation Request – Bona Fide Purchasers for Value – Prejudice

Branch Banking & Trust Co. v. Teague (Lawyers Weekly No. 12-07-0324, 20 pp.) (Cheri Beasley, J.) (Sam Ervin IV, J., concurring in part & dissenting in part) Appealed from Pasquotank County Superior Court. (Cy A. Grant Sr., J.) N.C. App. Full-text opinion.

Holding: When judgment creditors agreed to reduce the judgment debtors’ $800,000 debt by $200,000 in exchange for the debtors’ property, the judgment creditors became bona fide purchasers for value. The judgment creditors were not required to prove that they relied on the mistaken property description in the plaintiff-bank’s deed of trust on the debtors’ land.

We affirm in part and reverse and remand in part the trial court’s grant of summary judgment for the judgment creditors.

Facts

The judgment debtors had divided their land into two tracts: Tract A, an undeveloped tract containing about .6 acres, and Tract B, which contains .7 acres and includes the debtors’ primary residence. When the plaintiff-bank lent the debtors $94,000 in 2009, the bank recorded a deed of trust which only described Tract A.

After the judgment creditors reduced the judgment debt by $200,000 in exchange for the debtors’ property, they commissioned a survey which revealed that the bank’s deed of trust only applied to Tract A. The judgment creditors sold the land at an auction sale at which they informed prospective bidders that the property was subject to a lien secured by a deed of trust applicable to a portion of the property.

The bank sought reformation of its 2009 deed of trust so as to include Tract B as additional collateral associated with the loan the bank made to the debtors, the imposition of an equitable lien on the entire parcel, and the foreclosure of the reformed deed of trust. The trial court granted summary judgment for the judgment creditors.

Discussion

When the court reforms an instrument in connection with the imposition of an equitable or parol trust, the general rule is that reformation will not be granted if prejudice would result to the rights of a bona fide purchaser for value without notice or someone occupying a similar status. The bank does not appear to dispute that the $200,000 reduction in the judgment debt constituted the provision of valuable consideration in return for the underlying transfer.

When the debtors executed the deed to the judgment creditors, the creditors had no notice that the bank or the debtors claimed that there was an error in the bank’s deed of trust. Thus, the judgment creditors were bona fide purchasers for value who took the property without notice of the alleged defect in the deed of trust.

Even if the omission of Tract B from the property used to secure the loan from the bank to the debtors resulted from a mutual mistake of the parties or should have otherwise led to the imposition of a parol trust or an equitable lien, any reformed deed of trust would not have priority over the deed from the debtors to the judgment creditors.

The bank argues that, in addition to demonstrating that the judgment creditors obtained a deed to the property for valuable consideration and without notice of the alleged error in the deed of trust, the judgment creditors must also show that, in reaching the decision to accept a deed to the property in exchange for reducing the amount of the judgment, they “actually relied” on the allegedly erroneous provisions of the deed of trust.

The bank relies on Noel Williams Masonry v. Vision Contractors of Charlotte, 103 N.C. App. 597, 406 S.E.2d 605 (1991). However, Williams Masonry is focused solely upon situations involving a party (a subcontractor) who, although not a bona fide purchaser for value, wishes to be treated as if it were one for purposes of resisting reformation based upon the imposition of a parol trust or an equitable lien. Williams Masonry held that parties who are not actual bona fide purchasers for value will not be treated as having that status in a situation involving reformation arising from the imposition of a parol trust in the event that there is no connection between their contract with the grantor of a deed of trust and the terms of that instrument.

In this case, however, the judgment creditors are indisputably bona fide purchasers for value.

The logic underlying Williams Masonry is not controlling in this case. Any failure on the part of the judgment creditors to establish that they “relied” on the alleged error in the deed of trust in deciding to take a deed in exchange for a reduction in the judgment amount is beside the point.

However, the trial court did err in granting summary judgment to the judgment creditors when they had not established they would be prejudiced by reformation of the deed.

The uncontroverted evidence shows that the value of the bank’s lien was subtracted from the fair market value of the property when the amount to credit the judgment was determined. When that fact is viewed in the light most favorable to the bank, whether the judgment creditors would be prejudiced by reformation of the deed is a genuine issue of material fact. As such, summary judgment on this particular issue was not proper, and the case is remanded to the lower court for consideration of potential prejudice to the judgment creditors.

Finally, we agree with the trial court that the bank is not entitled to have Tract B subjected to an equitable lien in the bank’s favor.

Affirmed in part, reversed and remanded in part.

Concurrence & Dissent

(Ervin, J.) The factors upon which the judgment creditors relied in deciding how much to credit the debtors for the deed to the property are legally irrelevant to the issue of whether the judgment creditors would be prejudiced by reformation of the deed of trust encumbering the property. As a result, the evidence upon which the court relies in reversing the trial court’s decision with respect to the prejudice issue does not relate to a “material” issue of fact because resolution of this issue would not affect the outcome of the case. I respectfully dissent from the court’s decision to remand this case to the trial court for consideration of this issue, while concurring with the remainder of its opinion.