Family Law Prof Blog

Editor: Margaret Ryznar
Indiana University
Robert H. McKinney School of Law

Saturday, August 12, 2006

Case Law Development: One Spouse's Mortgage of Entireties Property Does Not Bind Non-borrowing Spouse

For those of you who live in entireties states and like to explore some of the inticracies of this unique marital ownership form with your classes, my colleague Pat Randolph, who runs the extraordinary DIRT website and listserve sent me this interesting case:

The Missouri Court of Appeals has held that where spouse executes the mortgage of entireties property, but the granting clause indicates that the mortgage is given by the other spouse only, who owns the property as separate property, and the mortgage secures a loan to that other spouse, the non-borrower spouse’s signature does not bind her to the mortgage, and the mortgage is void when the borrower spouse dies.

Ethridge v. Tierone Bank, 2006 WL. 1280957 (Mo. App. 5/11/06)
opinion on the web (last visited August 11, 2006 bgf)

Husband and wife owned property as tenants by entireties. H, who ran the finances for the family, resolved to pay off the first mortgage and obtain funds to remodel an artist’s studio into a rental. The lender prepared documents by which husband alone borrowed the money. The deed of trust, consistent with that notion, stated that the property was owned by H, a married man, as his separate property, and there was only a signature line for him. It also had standard language warranting that the grantor of the deed owned the property.

The title report showed the wife’s interest, and in fact the wife showed up at the closing. The closing agent (a non-lawyer), noticing the discrepancy between the title report and the deed of trust, asked the wife to execute the deed of trust, which she did, knowing what she was doing and why.

Later, husband died and the wife stopped payment on the note. She pointed out that she had never executed the note, and claimed that the deed of trust was invalid as to her. The court granted summary judgment for the wife, finding the deed of trust invalid as to her, and the lender appealed.

The appeals court here concluded that there was no ambiguity in the signature process, and that there was no question that the wife executed the deed of trust in order to demonstrate that she was “joining” in the deed of trust. Nevertheless, the court agreed with the trial court that the deed of trust did not bind the entireties property because the granting clause failed to indicate the purpose of binding the spouse’s entireties interest.

Here is what the court said about the signature:

. . . Mary would have been required to "join" in the Deed of Trust, even though the real estate was David's separate property [in light of Missouri’s marital rights statutes].. Mary's act of signing and acknowledging the Deed of Trust would have been sufficient to show that she joined in a deed conveying real estate solely owned by her husband. . . . To demonstrate her joinder in the Deed of Trust, it was not necessary that she also be named as a grantor. Furthermore, Mary's execution of the Deed of Trust to convey whatever marital rights she possessed in her husband's separate property would not have caused her to be bound by the covenant of title contained therein. . . . As drafted and executed, the Deed of Trust appears on its face to show that David, acting as the grantor, conveyed real estate solely and separately owned by him and that his wife, Mary, signed the instrument to show her joinder in the Deed of Trust. Accordingly, we do not find the terms of this instrument are susceptible of more than one meaning so as to create an ambiguity.

What the Deed of Trust purported to do, however, is not determinative of what it actually accomplished. The record discloses without dispute that David and Mary owned the real estate as tenants by the entirety. While the Deed of Trust was not ambiguous, it also was not a valid conveyance because, as the trial court correctly observed, Mary was not named as one of the grantors.

According to the court, this argument the rejection of a finding of ambiguity, and thus there was no possible interpretation other than that the wife was simply waiving her interest in the husband's separate property. The fact that the husband had no separate property (since the property in fact was in tenancy by the entireties) didn't matter. And Missouri law was quite specific that a granting clause must accurately state the interest conveyed. Unless the granting clause stated that the property was a tenancy by the entireties, the court could not construe the document as conveying a mortgage on the interest.

Under Missouri law, then, the mortgage would have been void even as to the husband's interest, since Missouri has that "slippery" kind of tenancy by the entireties that one cotenant has no power to mortgage. But the court nevertheless reversed summary judgment for the wife because, by granting summary judgment, the trial court also had rejected the lender’s claim that it was entitled to equitable subrogation to the position of the first lender that its loan proceeds had paid.

The court concluded that, since equitable subrogation is an equitable doctrine, it is still available even when the legal documents are inadequate to create an interest. The case is not a typical equitable subrogation case, since there is no issue of priority. But equitable subrogation can also be used to avoid unjust enrichment. Here, if equitable subrogation were to be denied, the wife would wind up with a release from the purchase money debt on the property while the lender suffered an inequitable loss.

Most remarkable about the opinion is footnote 7, in which the court notes that the lender’s other claims, that the deed of trust should be reformed or that the wife was equitable estopped from denying the validity of the deed of trust, were still alive. The fact that the court did not discuss them on appeal did not mean that it viewed the trial court’s summary judgment on these issues to be correct.

Professor Randolph's Comment:

The appeals court ruling on equitable subrogation seems correct. But why in the world didn’t it proceed to consider the reformation and estoppel arguments? These would have resolved the case more clearly, and the lender’s arguments here seem quite plain. Perhaps the court wanted the trial court to look more carefully at the factual support for these arguments now that it has concluded that equitable arguments are appropriate here.

Ambiguity, of course, is not necessary for a court to grant reformation. There can be an unambiguous document, but the court can still conclude that it is not the right document to carry out the parties’ intended purpose. This seems to be evident here.

Estoppel also seems appropriate, based upon unjust enrichment. The wife knowingly accepted the proceeds and they were invested in improvement of her residence to create a rental unit out of an abandoned studio. We’ll have to wait and see, one supposes, on these issues. But the editor suspects that the court is hoping that the lender will accept “half a loaf” and take the subrogated claim and not push any harder to punish the widow. Maybe rough country justice, but hardly good precedent for our commercial system. It is also arguable, of course, that the wife was unjustly enriched when the balance of the loan proceeds

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