D.C. Court of Appeals Holds Seller is Estopped From Unwinding Real Estate Transaction Due to Failure to Read Settlement Documents

In Moore v. Deutsche Bank Nat'l Trust Co., the District of Columbia Court of Appeals rejected a Seller’s title challenge to a post-foreclosure eviction, where she claimed that she had been defrauded into selling the property.  Although Seller claimed that the Purchaser misled her to believe that she was refinancing her prior mortgage loan, the Court of Appeals rejected her claim, determining that she failed to prove her fraud and forgery allegations by clear and convincing evidence.  Rather, the evidence suggested that her alleged misunderstanding was due to her own negligence in failing to read the documents before signing them.  Accordingly, the Court determined she has no interest in the property.

A copy of this opinion is available here.

Background

Seller claimed that she sought to refinance her mortgage to obtain $300,000 to make improvements to the property.  She contacted a loan officer, who informed her that she would need a co-signer, and introduced her to Purchaser who would be willing to co-sign the loan for a $100,000 fee.   During her first meeting with Purchaser, Seller signed several documents handed to her by a notary, including many that she did not read completely, and others without reading them at all.  Op. at 3.

Following the meeting, Seller received $78,435.45.  Because this was far less than the $300,000 she expected, she contacting the loan officer, who informed her that there was no record of her loan.  Seller contacted Purchaser, who told her that she had sold him the property and that he had a sales contract bearing her signature.  Appellant sued Purchaser for fraud, which was settled between the parties, whereby Seller agreed to assist Purchaser in paying the mortgage until 2008, when he would transfer the property back to Seller provided she pay-off the balance of the loan.

Despite such agreement, Purchaser defaulted on his own mortgage on the property.  At the foreclosure sale, Bank credit bid its debt, and purchased the property.  Bank thereafter filed a complaint for possession in the Superior Court, to which Seller filed a plea of title and counterclaim asserting that Purchaser and Bank had no interest in the property because she was defrauded into selling it.

Following a trial, the Superior Court ruled in favor of Bank, determining that Seller had not met her evidentiary burden to prove by clear and convincing evidence that the deed was forged or that the transaction was fraudulent.   Seller thereafter filed the present appeal.

Discussion

On appeal, Seller argued that the deed recorded in the land records was an altered forgery; that the transaction conveying the property to Purchaser was fraudulent and void ab initio; and that Bank’s interest in the property was therefore invalid.  Op. at 7.  She also claimed Bank was not a bona-fide lender for value without notice.

Rejecting her challenge, the Court of Appeals affirmed the trial court’s findings that “[t]he evidence indicating [that Seller] knew that the transaction was a sale of her property is overwhelming.”  Op. at 13.  The Court observed that the documents signed by the Seller included an a HUD-1 settlement statement, a “Correction Agreement, Limited Power of Attorney,” and two disbursement authorizations, all of which referred to sale of the property and which Seller signed over lines marked “seller.”  Op. at 4-5.  Seller also admitted that the signature on the recorded deed “looks like my signature,” but claimed that she didn’t remember signing it.  Op. at 6.

The Court also rejected Seller’s claim that the recorded deed was forged, explaining that “[t]here is a presumption that a deed is what it purports to be on its face, and one who seeks to establish the contrary has the burden of doing so by clear and convincing evidence.”  Op. at 8.  The Court held that Seller’s possession of an unsigned deed with different terms was insufficient because it could not compel an inference that she was given that version to sign.  Op. at 8.  Nor did a mistake in the notary block referencing the Purchaser instead of the Seller suggest that the deed was forged.  Op. at 8.  Rather, the trial court deemed such irregularity a “clerical error.”  Op. at 8.

Seller also claimed that she proved fraud in the factum, i.e., fraud which “procures a party’s signature to an instrument without knowledge of its true nature or contents.”  Op. at 9.   However, the Court noted that such a claim must be proved by clear and convincing evidence, and that the claimant would be estopped from making such claim if as a “literate and reasonably intelligent” person they fail to read the instrument.   Op. at 9.

Here, the Court agreed with the trial court that “the weight of the evidence did not support [Seller]’s claim that she signed the closing documents believing that they were refinancing documents.” Op. at 10. 

Moreover, the Court observed that Seller was a college graduate, had experience in property transactions, and had the opportunity to read the documents before signing.  Op. at 10.  Even assuming that Seller did not understand them, such a misunderstanding was due to her own negligence, negating any fraud-in-the-factum defense.   Op. at 10-11.

Finally, the Court rejected Seller’s fraudulent inducement claim, noting that “the evidence indicating that [Seller] knew that the transaction was a sale of her property is overwhelming.”  Op. at 12.  In addition to signing the documents, Seller could not give information she would be expected to know if she intended a mortgage refinancing, such as the amount of her new monthly payments.  Op. at 12.

The Court echoed the trial court’s suspicions as to whether the transaction as a whole was legitimate, but nevertheless agreed with the findings of the trial court, which was unable to accept as true Seller’s claim that she believed the transaction was a refinancing.  Accordingly, as Seller failed to meet her evidentiary burden, the Court affirmed the trial court’s judgment in favor of Bank.   Op. at 11-12.    In doing so, the Court determined that it need not address Seller’s challenge to the Bank’s status as a bona-fide purchaser for value.  Op. at 2, n.1.

D.C. Circuit Holds Lender Entitled to Equitable Subrogration Despite Its Actual Knowledge That Co-Owner Refused To Sign Mortgage

In Smith v. First American Title Insurance Company, the U.S. Court of Appeals for the District of Columbia held that, under D.C. law, a lender (New Lender) was entitled to equitable subrogation for amounts paid off by its loan against a co-owner’s (Co-Owner) interest in property jointly owned with Borrower, even though New Lender had actual knowledge that Co-Owner had refused to sign its refinance loan documents.  Consequently, equitable subrogation enabled New Lender to assert the same rights against Co-Owner and Borrower’s house that their prior lender held under the paid-off mortgage.  See Op. at 3.

A copy of the opinion is available here.

Background

Co-Owner and his mother, Borrower, jointly owned a house in the District of Columbia, which was subject to a $115,000 mortgage bearing a 6.5% interest rate (the “Prior Mortgage”), which they both signed.  Thereafter, a new lender (“New Lender”) offered Borrower a $135,000 mortgage, with a 9.65% interest rate (the “New Mortgage”), which allowed for Borrower to obtain $6,000 in cash at settlement.  Co-Owner refused to sign the paperwork because he thought the rate was too high. 

Nevertheless, New Lender proceeded to make the loan without Co-Owner’s signature on the New Mortgage, and such loan was used to satisfy and release the Prior Mortgage.  The Court noted that, technically, although the New Mortgage gave New Lender rights to Borrower’s half-interest in the Property, it did not give New Lender any rights to Co-Owner’s half-interest in the Property.  “As a result, without paying a cent, [Co-Owner] ended up with a half-interest in the house free of both the [Prior] Mortgage and the [New] Mortgage” Op. at 3.

Borrower later declared bankruptcy.  Because New Lender could not foreclose against the Property as a whole, New Lender filed suit in Bankruptcy Court seeking equitable subrogation against Co-Owner’s interest, which was permitted by the Bankruptcy Court and District Court.  Co-Owner and Borrower thereafter appealed to the U.S. Court of Appeals for the D.C. Circuit, which affirmed the application of equitable subrogation. 

Discussion

“The doctrine of equitable subrogation permits courts to declare that the owner of a mortgage (New Lender) has the same rights as an earlier-in-time owner of another mortgage (Prior Lender) on the same property, if certain conditions are met.  The purpose of equitable subrogation is ‘to prevent forfeiture and unjust enrichment.’”  Op. at 3 (citing Eastern Savings Bank, FSB v. Pappas, 829 A.2d 953, 957 (D.C. 2003) (internal quotation marks omitted)).

Under D.C. law, New Lender is entitled to equitable subrogation if it meets each prong of a five-part test: (1) New Lender paid off the Prior Mortgage to protect New Lender’s “own interest”; (2) New Lender has not “acted as a volunteer”; (3) New Lender “was not primarily liable” for the Prior Mortgage; (4) New Lender paid off the entire Prior Mortgage; and (5) subrogation would “not work any injustice to the rights of others.” Id. at 4-5 (quoting Eastern Savings Bank, FSB v. Pappas, 829 A.2d 953, 961 (D.C. 2003) (internal quotation marks omitted)).

The Court of Appeals determined that the first four prongs of the test for equitable subrogation were straightforward.  See Op. at 5.  As to the fifth prong, the Court concluded that equitable subrogation would not work an injustice.  “To begin with, equitable subrogation does not in any way affect [Borrower]’s rights. And equitable subrogation likewise does not work an injustice on [Co-Owner]. The Bankruptcy Court held that [New Lender] is entitled to equitable subrogation on the same terms as the [Prior Mortgage]. So, [Co-Owner] is obligated to [New Lender] only for the balance of the [Prior Mortgage], and only at the lower interest rate of the [Prior Mortgage].  Equitable subrogation simply prevents [Co-Owner] from enjoying a windfall.  It does not work an injustice because it makes him no worse off than he would have been under the [Prior Mortgage] had [Borrower] never agreed to the mortgage with [New Lender].” Op. at 5-6 (citations omitted).

Although the Court acknowledged that “[u]nder D.C. law, it is unsettled whether ‘actual knowledge bars equitable subrogation,’” Op. at 6, it predicted that the D.C. Court of Appeals (i.e., the state court) would allow for its application, noting that that the D.C. Court “endorsed an approach in which ‘no attention should be paid to technicalities which are not of an insuperable character, but the broad equities should always be sought out so far as possible. . . .,”  and therefore adopted a “rule requiring liberal application of the doctrine of subrogation.” Op. at 7 (quoting Burgoon v. Lavezzo, 92 F.2d 726 (D.C. Cir. 1937)).  Further, the federal appellate court noted that the D.C. Court of Appeals looks to the Restatement for guidance on questions of law involving equitable subrogation, which “has adopted the more liberal approach to equitable subrogation, under which actual knowledge does not bar application of the doctrine.” Op. at 7-8 (citing Restatement (Third) of Property: Mortgages § 7.6 cmt. e (1997)).

Moreover, the Court noted that “[i]n Burgoon, the court determined that equitable subrogation was appropriate because the lender could have achieved the same result by taking an assignment of the original loan.”  Op. at 8 (citing Burgoon, 92 F.2d at 736).  Likewise, here, “[i]nstead of taking out a new mortgage on the house, New Lender could have asked [Prior Lender] to assign [the Prior Mortgage [ to [New Lender]. Through assignment, [New Lender] would have obtained [Prior Lender]’s rights to [Co-Owner]’s half-interest in the house.” Op. at 8.

Consequently, the Court determined that New Lender was entitled to equitable subrogation under D.C. law.

Va. Supreme Ct. Holds After-Acquired Property Statute Does Not Affect Priority Of Third Parties; Prior Recorded Deed Of Trust Not “Duly Admitted To Record” Where Outside Chain Of Title

In Deutsche Bank National Trust Company v. Arrington, a priority dispute concerning real property, the Supreme Court of Virginia held that the after-acquired property statute, which validated prior conveyances where the grantor subsequently obtains an interest in property, “only applies between the parties to a deed and does not affect the rights of third parties or influence the relative priority of their interests.” Op. at 12.  The Court further held that a bank whose deed of trust was recorded first, but was made by a grantor outside the chain of title, was not “duly admitted to record” and therefore was not entitled to priority against lien creditors.

A copy of the opinion is available here.

In Arrington, the Court considered a priority dispute between a Bank’s deed of trust, and a subsequently recorded deed of trust in favor of the borrower’s former spouse (Wife) to secure payments as part of a contempt order.  Specifically, a divorce decree provided that certain property held by the couple would be conveyed solely to Husband, and that Husband would make several payments over time to Wife for ten years.  Following the entry of this divorce decree, in 2004, Wife conveyed her interest by deed of gift to Husband, which was recorded in the land records.

The following year, in 2005, Husband conveyed the Property to Third Party by general warranty deed, which was also recorded in the land records.  Despite such conveyance, which had divested Husband of record title, in 2006, Husband executed a deed of trust in favor of Bank, which was also recorded in the land records. 

Thereafter, in 2009, because he had fallen behind in his payments to Wife as provided in the divorce decree, to purge his contempt, the court required Husband to execute a deed of trust in favor of Wife (“Wife’s Deed of Trust”), which was recorded in the land records to secure repayment of amounts referenced in the divorce decree.

Prior to Wife’s recording her deed of trust, Third-Party executed a general warranty deed re-conveying the property back to Husband, which was recorded in the land records.   Immediately thereafter, Wife’s Deed of Trust was recorded, together with a copy of the divorce decree and contempt order.  

Bank filed a complaint seeking a declaration that the Bank Deed of Trust was a valid first priority lien on the Property.  In response, Wife filed an answer requesting a declaration that Wife’s Deed of Trust was a valid first priority lien.  Upon cross-motions for summary judgment, the trial court held that Wife’s Deed of Trust enjoyed priority, because when she recorded her deed of trust, Husband was the record owner of the property, whereas when the Bank recorded its deed of trust, Third Party was the record owner of the property.  The trial court also held that the after-acquired property statute, Virginia Code § 55-52, could not elevate the Bank Deed of Trust in priority over Wife’s Deed of Trust.  On appeal, the Supreme Court of Virginia affirmed.

The Court rejected the Bank’s argument that it held priority once Husband was re-vested with the property from Third Party under the after-acquired property statute.  The Court held that the statute itself was limited by its terms to the grantor and grantee, i.e., Husband and the Bank.  Specifically, the statute, Virginia Code § 55-52, provides:

When a deed purports to convey property, real or personal, describing it with reasonable certainty, which the grantor does not own at the time of the execution of the deed, but subsequently acquires, such deed shall, as between the parties thereto, have the same effect as if the title which the grantor subsequently acquires were vested in him at the time of the execution of such deed and thereby conveyed.

Id.  (Emphases added).

Determining that the statute applied not only to deeds, but also to deeds of trust, see Op. at 7, the Court explained, “[r]ead in its entirety, Code § 55-52 provides that when a grantor purports to convey property — without holding title — to a grantee, the grantor cannot thereafter deny that title has actually passed to the grantee. . . . Code § 55-52 governs the rights of a grantee vis-à-vis the grantor. It does not purport to affect the deeds of third parties, in this instance [Wife], or influence the relative priority of their interests.” Op. at 5-6. 

The Court thereafter determined the priorities of the parties based upon the recording act, Virginia Code § 55-96, which provides:

Every (i) such contract in writing, (ii) deed conveying any such estate or term, (iii) deed of gift, or deed of trust, or mortgage conveying real estate . . . shall be void as to all purchasers for valuable consideration without notice not parties thereto and lien creditors, until and except from the time it is duly admitted to record in the county or city wherein the property embraced in such contract, deed, or bill of sale may be.

Id.  Under the Recording Act, the Court explained, the “[Bank] Deed of Trust does not impair [Wife’s] priority if she is either (1) a purchaser for valuable consideration without notice or (2) a lien creditor, and the [Bank] Deed of Trust was not ‘duly admitted to record’ before she qualified as either. If she is a lien creditor and the [Bank] Deed of Trust has not been ‘duly admitted to record,’ then it is irrelevant whether she had notice of Bank's interest.” Op. at 8-9.

After easily determining Wife to be a lien creditor under her deed of trust, see Op. at 10-11, the Court determined that the Bank Deed of Trust was void as to Wife, because it was not “duly admitted to record” as it was recorded prior to Husband holding record title.  Op. at 12.  “Because the [Bank] Deed of Trust was not properly recorded in the chain of title, it was not ‘duly admitted to record’ even though it was recorded before [Wife] acquired her interest. Finally, because [Wife] is a lien creditor, whether she had actual or constructive notice of the [Bank] Deed of Trust is irrelevant. See Code § 55-96(A)(1). Therefore, [Wife] qualifies as a lien creditor under Code § 55-96(A)(1), and as a result, the [Wife] Deed of Trust has priority over the [Bank] Deed of Trust.”  Id.

Accordingly, the Supreme Court affirmed, concluding that the Wife’s deed of trust was entitled to priority.