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Reformation: How A Mortgage With An Erroneous Legal Description Can Be Foreclosed

Lenders and their foreclosure counsel might be faced with a mortgage with a legal description of the subject real estate that is erroneous.  I’ve seen everything from innocuous typos to descriptions of an entirely separate parcel.  Is foreclosure still a possibility?  Yes.  Beneficial Financial v. Hatton, 998 N.E.2d 232 (Ind. Ct. App. 2013) explains how. 

Approach.  In Beneficial, foreclosure counsel discovered an error in the legal description.  Both the lender and the borrower agreed that the original mortgage identified a parcel of property that neither party intended to mortgage.  So, in addition to filing the standard foreclosure complaint, counsel added a cause of action for “reformation.”  The borrower filed a motion to dismiss, arguing that the mortgage was ineffective “due to the error in the legal description.” 

Reformation law.  Indiana law on reformation is well-settled.  Here are the primary points: 

• Reformation is an equitable remedy to relieve the parties of mutual mistake or fraud.

• In cases involving mutual mistake, the party seeking reformation must establish (1) the true intentions of the parties, (2) that a mistake was made, (3) that the mistake was mutual, and (4) that the instrument did not reflect the true intentions of the parties. 

The Court in Beneficial stated that, to prevail, it was incumbent upon the lender to prove that its original intent, and that of the borrower, “was to describe a different piece of real estate than that which was in fact described in the mortgage instrument.” 

Proving intent.  The tricky thing in these cases can be in proving intent.  Sometimes the borrower is out of the picture, and sometimes the current plaintiff/mortgagee wasn’t the original lender.  Meeting the burden of proof can be difficult.  The Court in Beneficial provided some guidance.  Courts look to the parties’ conduct during the course of the contract negotiations and closing.  The Court hinted that evidence in favor of reformation could include, for instance, (1) the real estate appraisal from the origination file, (2) the HUD-1 settlement statement, (3) the loan application and (4) the loan approval form.  Courts will examine evidence that would be compelling on the question of the identity of the real estate that the parties originally intended to be mortgaged. 

Dismissal overturned.  The Court of Appeals reversed the trial court’s dismissal in Beneficial, reasoning that if the lender “were not allowed to proceed beyond the filing of a complaint merely because the description of the property is erroneous, then the viability of any mortgage reformation action . . . is called into question, and indeed perhaps rendered impossible.”  The Court gave the lender the opportunity to prove that a mutual mistake occurred in its mortgage with the borrower.  If the lender were subsequently able to establish that the mortgage’s legal description was a mistake, and that a different description was intended, then the trial court would be compelled to reform (correct) the mortgage, thereby opening the door to foreclosure of the reformed mortgage on the correct real estate.

Note Assignment (Allonge) And Mortgage Deemed Valid In Recent Opinion

Buchanan v. HSBC, 993 N.E.2d 275 (Ind. Ct. App. 2013) is another decision shooting down a borrower’s defenses to an Indiana mortgage foreclosure action.  In Buchanan, the borrower contested the validity of both the promissory note and the mortgage. 

Assignment defects.  The borrower attacked the legitimacy of the assignment of the promissory note from the original lender to the plaintiff/current lender.  The borrower asserted that (1) the note did not include an endorsement and (2) the allonge was not dated. 

    Allonge application.  The Indiana Court of Appeals first cited to the definition of an “allonge” by referring to Black’s Law Dictionary.  An allonge is a paper “attached to a negotiable instrument [a promissory note] for the purpose of receiving further endorsements when the original is filled.”  The Buchanan Court noted that it was unnecessary to use an allonge because the note did not contain any endorsements (and thus was not “filled”).  Nevertheless, the Court concluded that “we are not aware of any reason to prohibit the use of an allonge in this case.”  In my experience, the use of an allonge, regardless of whether there have been any endorsements, is a common and accepted practice. 

    Allonge okay.  The lender pointed out that the allonge to the subject promissory note was endorsed in blank – a concept about which I discussed on 10/17/14.  Endorsing in blank is a non-issue.  The Court also concluded that the lender’s failure to produce a dated allonge was immaterial.  There is no authority that the lack of a date on an allonge renders it invalid.  (The lender submitted an affidavit showing the year of the transfer of the note.  So, even though there was no date certain in the allonge, there was evidence as to when the transfer occurred.) 

Mortgage acknowledgement.  The borrower contended that the subject mortgage “lacked the requisite acknowledgement” and thus was unenforceable.  Ind. Code § 32-29-1-5(d) requires Indiana mortgages to be “dated and signed, sealed, and acknowledged by the grantor . . . ,” among other things.  The borrower’s argument was that the notary public did not have any authority in Indiana but was limited in its commission to Kentucky.  Indeed there is Indiana case law providing that a notary public’s official activities are limited to the political subdivision for which it is appointed and commissioned and, furthermore, that acts outside of the territorial limits are void.  The Court in Buchanan bypassed the borrower’s argument, stating “we need not decide whether the mortgage was properly acknowledged.”  The Court’s reasoning was that the borrower did not deny that he executed the mortgage and note when he purchased the subject real estate.  Moreover, Indiana case law provides that an “unacknowledged instrument is binding between parties and their privies,” meaning that, as between the borrower and the lender, the notarial acknowledgement was insignificant, according to the Court.

Upheld.  The Indiana Court of Appeals affirmed the trial court’s findings that the lender was the holder of the subject note and that the mortgage was valid despite an allegedly defective acknowledgement.

Indiana Rejects Foreclosure Defenses Based On The Redemptionist Movement And The Vapor Money Theory

Over the years, we have seen borrowers and guarantors defend mortgage foreclosure cases on theories that are pretty out there.  The defenses asserted in Blocker v. U.S. Bank, 2013 Ind. App. LEXIS 396 (Ind. App. 2013) might take the cake.

Payment?  In Blocker, following the initiation of foreclosure proceedings, a Marcus Lenton character sent a personal, non-certified check for the full amount of the debt to the lender, on behalf of the borrowers, to pay off the loan.  In the endorsement box on the back of the check, Lenton wrote, “NOT FOR DEPOSIT EFT ONLY.”  The lender informed the borrowers that a payoff only could occur via certified funds (money order, cashier’s check or wire transfer).  Not to be denied, the borrowers next presented to the lender a “lawful order for money,” directed to the U.S. Treasury, that supposedly drew, on Lenton’s account, a sum in an amount to pay off the debt.  Not surprisingly, the lender did not accept that payment either.  Later, in response to the lender’s summary judgment motion, the borrowers presented a document to the lender labeled “International Promissory Note…” written for an amount sufficient to satisfy the debt.  The document was not written against any bank account but rather against the Lenton Trust as Drawee with Lenton himself as the Drawer.  Again, the lender refused to accept this as payment.

Borrowers’ contention.  The trial court granted summary judgment in favor of the lender.  On appeal, the borrowers asserted that they tendered three payments to the lender, through Lenton, which should have discharged the debt.  The Indiana Court of Appeals concluded that the borrowers’ payment attempts were not done through normal banking channels but rather a “confusing” effort by Lenton to compel the U.S. Treasury Department to pay off the borrowers’ mortgage.

Redemptionist movement.  The Court wrote that the borrowers’ arguments appeared to be an outgrowth of the so-called “redemptionist movement,” which has been explained as follows:

“[T]he “Redemptionist” theory…propounds that a person has a split personality: a real person and a fictional person called the “strawman.”  The “strawman” purportedly came into being when the United States went off the gold standard in 1933, and, instead, pledged the strawman of its citizens as collateral for the country’s national debt.  Redemptionists claim that government has power only over the strawman and not over the live person, who remains free.


Vapor money theory.  The Court also identified a philosophy, closely related to the redemptionist theory, that evidently played a role in the borrowers’ arguments:

The “vapor money” (or “no money lent”) theory posits that Congress has never given banks the authority to extend credit and, thus, banks act beyond their charters when making loans.  Proponents claim banks create money “out of thin air,” through ledger entries and bookkeeping tricks, by “depositing” a borrower’s promissory note without the borrower’s permission, listing the note as an “asset” on the bank’s ledger entries, and then lending a borrower back his own “money.”  Since banks do not have enough “real money in their vaults” to cover the sums lent, loans are not backed by actual money--the only real money is gold or silver; paper money is worthless since it is created by an illegitimate Federal Reserve--making them invalid ab initio and creating no obligation for repayment.

Alrighty then.

Uh, no.  The Court noted that both the vapor money and redemptionist theories have been “roundly rejected by courts across the nation.”  Lenton’s attempts to pay off the borrowers’ mortgage debt “were not only unorthodox but also legally unacceptable.”  The Court’s summary is fairly amusing:

It is unclear who Lenton is or what his relationship to the [borrowers] is and whether he represented to them that he knew the “secret formula” to accessing money locked away in a clandestine Treasury Department account but, in any event, he clearly failed to access or provide the funds needed to pay off their mortgage.

The Court affirmed the trial court’s summary judgment for the lender accordingly.