In recently dealing with a client who wanted to add his fiancée to the deed on his home, although he was to solely remain on the mortgage and note, I was reminded of a quirky case decided by the Pennsylvania Supreme Court in 2005.
In 1999, Susan and Joseph Muthler purchased a property that was titled in both their names (In Pennsylvania this form of joint ownership between husband and wife is known as tenants-by-the-entirety and allows for the property to automatically transfer upon the death of one spouse to the surviving spouse). The Muthlers jointly applied for a mortgage, and initially, both of their names appeared on the mortgage documents. Sometime before closing, the lender, CTX Mortgage Company, decided on its own to remove Susan’s name from the documents.
Shortly after the transaction closed, Joseph passed away. Susan contacted the successor to the lender, who was now servicing the loan, and attempted to transfer the mortgage to her name; the company refused! Susan ultimately contacted an attorney who advised her that the property transferred to her upon Joseph’s death, and since she was not named as a mortgagor/signatory to the mortgage on the loan documents, she had no obligation to make the remaining mortgage payments. Following her attorney’s legal guidance, Susan stopped making payments. Regions Mortgage, Inc., the company now handling the loan, filed an action to quiet title.
At the trial level, Regions argued that a mistake had been made in the preparation of the loan documents, and that it was entitled to “reformation” or correction of the mortgage. The trial court, utilizing a totality of the circumstances approach, decided that equity could only be served by a decree that Susan’s property was subject to the mortgage Joseph executed before his death.
On appeal, the Superior Court (an appellate court in Pennsylvania), reversed the trial court’s ruling concluding that Regions failed to show by clear and convincing evidence the existence of either a mutual or unilateral mistake.
The Pennsylvania Supreme Court took up the case. The Court discussed the scenarios under which reformation of a deed (or, as in this case, a mortgage) could take place. First, the Court discussed the case of “mutual mistake”- this is one where each party misunderstands the other’s intent and the mistake is shared and relied on by both parties to a contract. The Supreme Court shot down Region’s argument that this transaction involved mutual mistake-holding that just because CTX Mortgage Company failed to properly secure its loan does not give rise to a mutual mistake of the parties.
Second, there is the case of “unilateral mistake”- where only one of the parties to the transaction makes a mistake, as CTX Mortgage Company did here in dropping Susan from the loan documents before closing. The Court explained that in order for reformation of the loan documents to be available due to a unilateral mistake, Regions must show that Susan had such knowledge of the mistake as to justify an inference of fraud or bad faith on her part.
In reviewing the testimony at trial, the Supreme Court found that there was no showing that Susan acted on her knowledge of the mistake with the intent of committing fraud or bad faith. Therefore, Regions was not entitled to reformation of the mortgage documents, and accordingly, Susan was entitled to take the property free and clear of any encumbrance.
While rarely do we ever see a case when a homebuyer gets a home for free, that’s essentially what Susan Muthler received—maybe somewhere her husband Joseph is smiling.