Tuesday, June 26, 2007

Ethridge v. TeirOne Bank[1]

Opinion handed down June 26, 2007

Where husband and wife owned land as tenants by the entirety, and where deed of trust listed only the husband as “Borrower”, deed of trust did not convey a valid lien on the wife’s interest in the property even though she signed the deed of trust.

I. Facts and Holding

Mary and David Ethridge purchased a home in 1999, using a deed of trust to secure the repayment of purchase money for the home. The Ethridges subsequently refinanced the loan. The new loan issued from First Fidelity Residential Lending, Inc. (hereafter, “Fidelity”).[2] David Ethridge signed a promissory note (hereafter “Note”) evidencing the new loan and also executed a deed of trust (hereafter “Deed of Trust”) prepared by Fidelity. The disposition of this case centers on the construction of the Deed of Trust.

The Deed of Trust defined the term “Borrower” as “David Ethridge, a married man, as his sole and separate property.” The Deed of Trust identified the Ethridges’ real estate as security for the repayment of the Note, and provided that “Borrower covenants that Borrower is lawfully seized of the estate hereby granted and has the right to grant and convey the Property.” The final paragraph of the Deed of Trust stated: “By signing below, Borrower accepts and agrees to the terms and covenants contained in this Security Instrument.” The Deed of Trust provided one line for a signature, with David Ethridge’s name typed below the line. David signed in the designated location, and Mary signed below his signature line. Both David and Mary initialed each page of the Deed of Trust. Each signed the settlement statement for the closing of the transaction. Proceeds of the new loan were used to pay and discharge the loan being refinanced (on which both David and Mary were liable).

The Ethridges made payments on the loan until December 2002, when David Ethridge was killed in an automobile accident; Mary made no further payments. Mary then sought to cancel the Deed of Trust because she was not technically named as a “grantor” in the Deed of Trust, which ostensibly meant she made no covenants of title and did not convey her interest in the property.

II. Legal Background

The chief issue in Ethridge was whether the Deed of Trust conveyed a valid lien to the refinancing lender on Mary Ethridge’s interest in land. To resolve the issue, the court sought to ascertain the parties’ intent by looking to the words of the contract.[3] The court restricted its analysis of intent to the four corners of the Deed of Trust since the court determined the Deed to be unambiguous.[4] In substantiating its conclusion of non-ambiguity, the court pointed to a number of factors: there was a clear definition of “Borrower” in the Deed of Trust [5]; the Deed of Trust did not reference another borrower; and Mary’s initials on each page of the Deed of Trust did not make ambiguous the Deed of Trust’s plain description of David Ethridge as the sole borrower and sole owner of the property. [6] The court made no attempt, however, to explain why Mary would have signed an instrument to which she did not intend to be bound.

Once the court determined the Deed of Trust to be unambiguous, which precluded consideration of extrinsic evidence, the court relied on Bradley v. Mo. Pac. Ry. Co. [7] to reach its conclusion that Mary did not use appropriate words to convey her estate, and consequently she conveyed none of her estate.[8] Mary and David Ethridge held the property as tenants by the entirety. A deed by only one of two tenants by the entirety conveys nothing, and since the court found David Ethridge to be the sole grantor in the Deed of Trust, the Deed of Trust conveyed nothing. [9]

The court then rejected Defendant’s argument that, notwithstanding the Deed of Trust’s invalidity, the court should nonetheless enforce the document on the affirmative defenses of reformation, equitable estoppel, equitable lien and equitable subrogation. For the doctrines of reformation, equitable estoppel and equitable lien, the court articulated the respective tests for application and then found Defendant’s claims missing one or more elements of each claim.[10] Moreover, the court found that Mary’s conduct was not of the egregious type required by the equitable subrogation doctrine. [11]

III. Comment

Because it constitutes a threshold issue, this comment will focus solely on the court’s finding that the Deed of Trust was unambiguous, which effectively precluded the use of the treasure chest of extrinsic evidence. [12] If the court would have found the Deed of Trust language ambiguous, the court would have avoided a forfeiture by the lender of thousands of dollars and would have yielded a decision preferring substance over form, which reflects the realities of the world of real estate financing. More importantly, it would have reached a decision of law that squares with the facts of the case.

In determining the unambiguous nature of the Deed of Trust, the court first articulated several standards of construction for determining ambiguity.[13] The court, however, did not consider the highly relevant fact that Mary initialed each page, and signed at the end of the Deed of Trust below where the document provided a place for the signature of the borrower, saying only that these facts “do not change the unambiguous nature of the deed’s plain description of David Ethridge as the sole borrower and sole owner of the property.”[14] The closest the court came to explaining away Mary’s conduct was to imply that the only reason she signed the Deed of Trust was because her husband told her to do so.[15] The inference from this behavior, then, is that Mary had only the intent to appease her husband on the day of the signing of the Deed of Trust (and to sign the Deed of Trust) but not the intent to transfer her interest in the real estate by way of encumbrance.

Certainly there is another explanation for Mary signing the Deed of Trust besides subordination to her husband. For instance, one could imagine a scenario where all the parties to the Deed of Trust took notice of the clerical error of naming Mr. Ethridge as the sole grantor. In response, the Ethridges attempted to resolve this problem by jointly ratifying each page (through initialing) and eventually the entire document by signing at the end. The court needed only find this explanation a reasonable construction of the content of the Deed of Trust’s language to render the language of the Deed of Trust ambiguous.[16] Using an alternative standard of finding ambiguity in the Deed of Trust, the two signatures at the end of the deed give rise to an “uncertainty.”[17] That is, there being two signatures at the end of the Deed of Trust is in direct conflict with typewritten word of the Deed of Trust describing only one grantor, Mr. Ethridge. These possible scenarios notwithstanding, the court still found the Deed of Trust unambiguous.

The court’s strained construction of the Deed of Trust is the only way it could find in favor of Mary. Parol evidence weighed heavily against her. On the day of the closing of the refinancing transaction, Mary signed a loan settlement statement in conjunction with the Deed of Trust. That settlement statement listed Mary as a “borrower” and she signed the statement, as borrower, in two separate places.[18] This evidence was consistent with a presumed intent that, by signing the Deed of Trust (and the companion settlement statement), she intended to be bound as a grantor. Without giving any plausible explanation for disregarding Mary’s signature on the Deed of Trust and settlement statement, the Court summarily decided there was no ambiguity which left it free to find in favor of Mary.

One other problem with the majority opinion in Ethridge is that it laid a foundation for the potential avoidance of many contracts with multiple signatories. By finding Mary not bound by the terms of the Deed of Trust, the court disregarded the longstanding rule that “when persons sign a contract and deed they are presumed to know their contents [and] to have accepted their terms.”[19] This statement of the law creates two problems in light of the court’s decision. First, the court explaining away Mary’s intent as a mere act of acquiescence to her husband’s demands [20] rests on untenable legal ground because she is presumed to know the contents of the Deed of Trust. The second problem is related to the first. If Mary truly understood the contents of the Deed of Trust,[21] and the law presumes she does, then one must wonder why she would not only sign the Deed of Trust but initial each page, apparently signaling her understanding of its terms. On this set of facts the court should have found, at a minimum, an ambiguity relative to the typed contents of the Deed of Trust, although legal precedent indicates the court should have held Mary bound by the agreement without the need to look at extrinsic evidence. Instead, the court has set a precedent whereby a person might avoid being bound by a contract if that person signed because she did it at the behest of a spouse that did not rise to the level of duress or undue influence.

-Andrew Crossett

[1] No. SC87734 (Mo. June 26, 2007) (en banc), available at http://www.courts.mo.gov/file.jsp?id=26493.  The West reporter citation is 226 S.W.3d 127 (Mo. 2007) (en banc).
[2] Fidelity subsequently assigned the note and deed of trust to TierOne Bank, the captioned defendant. Id. at 130.
[3] Id. at 131 (citing State ex rel. Vincent v. Schneider, 194 S.W.3d 853, 859-860 (Mo. 2006)).
[4] Id. See Trimble v. Pranca, 167 S.W.3d 706, 714 (Mo. 2005) (reciting rule that absent ambiguity, “intent of the parties…is determined based on the contract alone.”)
[5] Notwithstanding the incorrect statement that title is solely vested in David Ethridge.
[6] Ethridge v. TierOne Bank, 226 S.W.3d 127, 131-32 (Mo. 2007). See also Wired Music, Inc. of the Great Midwest v. Great River Steamboat Co., 554 S.W.2d 466 (Mo. App. E.D. 1977). The court in Wired Music determined that where an individual signs a contract in his representative capacity, and this signature conflicts with the terms of the contract imposing personal liability on any signatory, the conflict between the form of the signature and the express terms of the contract created an ambiguity warranting a look to extrinsic evidence. Id. at 469.
[7] 4 S.W. at 427, 428 (Mo. 1887). Bradley was a similar case except that decision focused on the fact that there was no reference, in the instrument in question, that the husband therein was a married man (not the case in Ethridge, where the Deed of Trust specifically recited that David Ethridge was a married man.).
[8] Ethridge, 226 S.W.3d at 132.
[9] Id. (citing Austin & Bass Builders, Inc. v. Lewis, 359 S.W.2d 711, 714 (Mo. 1962)).
[10] Id. at 132-134.
[11] Id. at 134.
[12] The dissent in Ethridge harshly criticizes the majority for its failure to use the remedy of reformation, and it subsequently provides an illustrative discussion of the remedy. Ethridge v. Tierone Bank, 226 S.W.3d 127, 135-37 (Mo. 2007) (Limbaugh, J., dissenting).
[13] The formulations used by the court in defining a standard for ambiguity are as follows: “if [the contract] terms are susceptible to honest and fair differences”; where “there is duplicity, indistinctness, or uncertainty in the meaning of the language in the [terms]”; if the “language…is reasonably open to different constructions.” Ethridge, 226 S.W.2d at 131.
[14] Id. at 131-132.
[15] Id. at 129.
[16] Seeck v. Geico Gen. Ins. Co., 212 S.W.3d 129, 132 (Mo. 2007) (finding that “language is ambiguous if it is reasonably open to different constructions”).
[17] Id.
[18] Ethridge v. Tierone Bank, 226 S.W.3d 127, 136 (Mo. 2007) (Limbaugh, J., dissenting).
[19] Wallach v. Joseph, 420 S.W.2d 289, 294 (Mo. 1967).
[20] See supra note 15.
[21] The relevant contents being that the Deed purported to grant a mortgage in property in which Mrs. Ethridge had an interest.