Although the defendant-landowners/debtors contend that the doctrine of unclean hands estops the plaintiff-bank from bringing its claim to reform defendants’ deed of trust, since the actions upon which defendants base their unclean hands argument were collateral to the transaction for which equitable relief is sought, the doctrine does not apply.
We affirm summary judgment for plaintiff.
In 2004, defendants agreed to mortgage their property for $1,820,000. Their attorney, using defendants’ power of attorney, recorded the deed of trust with no description of the encumbered land.
A few months later, the attorney – without defendants’ knowledge – filed a corrected deed of trust including the description. However, in the meantime, defendants had obtained another loan secured by their property.
After defendants missed payments on their original promissory note, plaintiff successfully sought a declaratory judgment (that the original deed of trust is a valid encumbrance on defendants’ property) and reformation of the deed of trust.
Defendants failed to present evidence to dispute that they, along with their lender, mutually intended for their deed of trust to include the legal description of their land.
Even though there is an apparent conflict as to who is the actual owner of defendants’ promissory note, uncontradicted evidence indicates that plaintiff is the holder of the note and so qualifies as a real party in interest in an action upon the note.
Defendants contend that the three-year statute of limitations in G.S. § 1-52(9) for claims based in “fraud or mistake” applies, but the deed of trust at issue is clearly a sealed instrument; therefore, the 10-year statute of limitations in G.S. § 1-47(2) applies.
Defendants base their unclean hands argument upon the allegation that plaintiff’s
predecessor-in-interest, Aurora Bank FSB, instructed defendants to intentionally miss a payment on their loan to allow for a modification. Aurora allegedly agreed to loan modifications, but then sent the forbearance agreement too late for defendants to return it by the stated deadline.
Defendants also contend that both plaintiff and Aurora reneged on oral agreements to restructure and modify the loan to avoid foreclosure. If plaintiff and Aurora did make the alleged representations and oral agreements to modify defendants’ loan, such agreements would be barred by the statute of frauds.
Defendants’ loan amount was $1,820,000. G.S. § 22-5 requires a signed writing for all commercial loan commitments in excess of $50,000.
Presuming, arguendo, that plaintiff cannot equitably assert the statute of frauds, the doctrine of unclean hands would still be inapplicable to bar plaintiff’s reformation claim.
If the alleged misconduct giving rise to the assertion of unclean hands arises out of matters which are merely collateral to the transaction for which equitable relief is sought, the equitable remedy is not barred. Here, the transaction for which plaintiff seeks the equitable relief of reformation concerns the execution and recordation of defendant’s original deed of trust on June 1, 2004. The alleged oral promises of Aurora to modify the terms of the loan secured by the original deed of trust were made years after the deed of trust was executed and are wholly collateral to the original transaction completed on June 1, 2004.
The doctrine of unclean hands does not bar plaintiff’s reformation claim.
Nationstar Mortgage, LLC v. Dean (Lawyers Weekly No. 011-284-18, 18 pp.) (John Tyson, J.) Appealed from Dare County Superior Court (Marvin Blount, J.) William Long, Matthew Barnes and E. Travis Ramey for plaintiff; M.H. Hood Ellis for defendants. N.C. App.