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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.