Scott Trent v. Mountain Commerce Bank ( 2020 )

IN THE SUPREME COURT OF TENNESSEE
AT KNOXVILLE
FILED
08/26/2020
Clerk of the
Appellate Courts
May 19, 2020 Session!
SCOTT TRENT ET AL. v. MOUNTAIN COMMERCE BANK ETAL.
Appeal by Permission from the Court of Appeals
Chancery Court for Hamblen County
No. 2017-CV-460 Jean A. Stanley, Judge’
No. E2018-01874-SC-R11-CV
The issue presented is whether a quitclaim deed should be equitably reformed when
reformation would benefit parties with constructive notice of a title defect and harm the
rights of creditors with recorded judgment liens. A husband and wife quitclaimed parcels
of real property to limited partnerships. The wife was omitted as a grantor on one of the
quitclaim deeds even though she and her husband owned the property as tenants by the
entirety. Two banks obtained judgments against the husband and wife and recorded the
judgments. The property was later sold, and the purchasers and their lender discovered that
the property was subject to the wife’s retained ownership interest and the banks’ recorded
judgment liens. To remedy the error, the husband and wife signed a quitclaim deed of
correction, referencing the wife’s omission as a grantor on the previous quitclaim deed.
‘The purchasers and their lender then filed this declaratory judgment action asking the trial
court to hold, based on mutual mistake, that the corrected quitclaim deed reformed the
original quitclaim deed, vested ownership in the limited partnership, divested the wife’s
interest, and removed the banks’ judgment liens. The trial court denied reformation, finding
that there was no mutual mistake by the husband and the limited partnership who signed
the original quitclaim deed. The Court of Appeals affirmed. After considering the equities
of the parties, we decline to grant reformation of the quitclaim deed because doing so would
deprive the banks of their recorded judgment liens and benefit the purchasers and their
lender who acquired the property with constructive notice of the wife’s remaining interest
in the property and the banks’ recorded judgment liens. Thus, we need not decide whether
reformation is an available remedy to correct a quitclaim deed by adding an omitted
grantor. We affirm the judgments of the trial court and the Court of Appeals, based on
different reasoning.
' We heard oral argument through videoconference under this Court’s emergency Order of April
24, 2020, restricting court proceedings because of the COVID-19 pandemic.
* Sitting by interchange.
Tenn. R. App. P. 11 Appeal by Permission; Judgment of the Court of Appeals
Affirmed; Judgment of the Trial Court Affirmed
SHARON G. LEE, J., delivered the opinion of the Court, in which JEFFREY S. BIVINS, C.J.,
and CORNELIA A. CLARK, HOLLY KIRBY, and ROGER A. PAGE, JJ., joined.
William E. Phillips, Sr., Rogersville, Tennessee, for the appellants, Scott Trent, Ted C.
Trent, Civis Bank, and William E. Phillips, Sr., Trustee.
Steven C. Huret, Kingsport, Tennessee, for the appellee, First Community Bank, N.A.
Edward J. Shultz, Knoxville, Tennessee, for the appellee, Mountain Commerce Bank.
OPINION
I.
Adren S. Greene and his wife, Pamela W. Greene, defaulted on real estate
development loans from Mountain Commerce Bank and People’s Community Bank. In
March 2010, Mr. and Mrs. Greene, facing possible foreclosure and deficiency actions,
asked an attorney to prepare quitclaim deeds transferring other property they owned to
limited partnerships in which the Greenes had an interest. The attorney drafted six
quitclaim deeds conveying ten parcels of property to either Real Estate Holdings of East
Tennessee, L.P. (“Real Estate Holdings’”)* or Real Estate Investments of East Tennessee,
L.P.
On March 10, 2010, Mr. and Mrs. Greene signed the quitclaim deeds at their
attorney’s office, believing that they had conveyed all of their interest in the ten parcels of
property. The Greenes did not review the quitclaim deeds before signing them, trusting that
the quitclaim deeds had been properly drafted. Mr. and Mrs. Greene owned property on
West First North Street in Morristown (“the Property”) as tenants by the entirety. Yet Mrs.
Greene was omitted as a grantor on the quitclaim deed transferring the Property to Real
Estate Holdings; only Mr. Greene signed the quitclaim deed, which was recorded on March
18, 2010.
Mountain Commerce Bank and People’s Community Bank separately foreclosed on
development property owned by the Greenes and sued them for the deficiency balances. In
3 The general partner of Real Estate Holdings was ASG Holdings Management, Inc., whose
president was Mr. Greene’s brother. Mr. Greene was vice president of ASG Holdings Management, Inc.
The limited partners of Real Estate Holdings were Mr. and Mrs. Greene.
9 =
January 2012, an agreed judgment was entered against Mr. and Mrs. Greene in favor of
Mountain Commerce Bank; the judgment was recorded in the Hamblen County Register
of Deeds office on October 22, 2013. In August 2012, an agreed order of judgment was
entered against Mr. and Mrs. Greene in favor of People’s Community Bank, a division of
First Community Bank; the judgment was recorded on March 28, 2013, in the Hamblen
County Register of Deeds office.
On August 30, 2016, Scott Trent and Ted C. Trent bought the Property from Real
Estate Holdings. Civis Bank financed the purchase. The Trents and their wives signed a
Deed of Trust to William E. Phillips, Sr., as Trustee for Civis Bank. Sometime in 2017, the
Trents and Civis Bank learned that Mrs. Greene retained an ownership interest in the
Property and that Mountain Commerce Bank and First Community Bank, N.A.* (“the
Banks”) had recorded judgment liens against the Property. On March 22, 2017, Mr. and
Mrs. Greene signed a corrected quitclaim deed to Real Estate Holdings, which was
recorded on March 29, 2017, in the Hamblen County Register of Deeds office. The
corrected quitclaim deed explained that Mrs. Greene had intended to convey her interest in
the Property to Real Estate Holdings under the 2010 quitclaim deed but had been omitted
as a grantor.
In September 2017, the Trents, along with Civis Bank and Mr. Phillips as Trustee
for Civis Bank (“the Petitioners”), petitioned the Hamblen County Chancery Court for a
declaratory judgment that the corrected quitclaim deed reformed the original quitclaim
deed, vested ownership of the Property in the limited partnership as of the date of the
original quitclaim deed, divested Mrs. Greene’s interest, and removed the judgment liens.
The declaratory judgment action named the Banks as respondents and sought a reformation
of the original quitclaim deed based on mutual mistake of the parties.
After a September 10, 2018 hearing, the trial court declined to reform the 2010
quitclaim deed to add Mrs. Greene as a grantor because she had not been a party to the
quitclaim deed and thus there had been no mutual mistake by the parties. The Court of
Appeals affirmed, reasoning that because Mr. Greene and Real Estate Holdings intended
that Mr. Greene would convey his interest in the Property to Real Estate Holdings, there
had been no mutual mistake between the parties to the quitclaim deed—Mr. Greene and
Real Estate Holdings. We granted the Petitioners’ application for review.
“ First Community Bank, according to its brief, operates as People’s Community Bank in
Tennessee.
Il.
The material facts here are undisputed, and so the determination of the priority of
rights among lienholders is solely a question of law. ABN AMRO Mortg. Grp., Inc. v.
S. Sec. Fed. Credit Union, 372 S.W.3d 121, 126 (Tenn. Ct. App. 2011) (citing Bankers
Trust Co. v. Collins, 124 §.W.3d 576, 578 (Tenn. Ct. App. 2003); ATS, Inc. v. Kent, 27
S.W.3d 923, 924 (Tenn. Ct. App. 1998)); Holiday Hospitality Franchising, Inc. v. States
Res., Inc., 232 $.W.3d 41, 47 (Tenn. Ct. App. 2006) (citations omitted). We review the
trial court’s ruling on questions of law de novo with no presumption of correctness. ABN
AMRO, 372 S.W.3d at 126 (citing ATS, Inc., 27 S.W.3d at 924); Holiday Hospitality, 232
S.W.3d at 47 (citation omitted),
The 2010 quitclaim deed’s omission of Mrs. Greene as a grantor posed a problem
because Mr. and Mrs. Greene owned the Property as tenants by the entirety. Only married
couples can own property as tenants by the entirety because the tenancy is “based on the
concept that those who are married are not separate persons; rather, they ‘are but one
person.’” Bryant v. Bryant, 522 8.W.3d 392, 400 (Tenn. 2017) (citations omitted). Under
a tenancy by the entirety, after the death of one spouse the surviving spouse owns the
property. /d. The surviving spouse does not acquire any new or further interest in the
property after the other spouse’s death because the surviving spouse always had that
ownership interest. Jd. When Mr. Greene conveyed his interest in the Property to Real
Estate Holdings, he could not legally convey Mrs. Greene’s ownership interest. See
Robinson v. Trousdale Cnty., 516 S.W.2d 626, 632 (enn. 1974) (explaining that under
tenancy by the entirety, one spouse can convey only his or her survivorship interest without
the other spouse’s consent, and “[a]ny unilateral attempt will be wholly .. . void at the
instance of the [other spouse] and any prospective purchaser, transferee, lessee, mortgagee
and the like will act at his peril”). Thus, the 2010 quitclaim deed conveyed to Real Estate
Holdings only Mr. Greene’s interest in the Property. Mrs. Greene retained her interest,
which meant that if Mrs. Greene survived her husband, she would own the entire interest
in the Property. See Bryant, 522 S.W.3d at 400.
The Banks’ judgment liens attached to Mrs. Greene’s remaining interest in the
Property upon recordation. See Tenn. Code Ann. § 25-5-101(b)(1) (2017); Tenn. Code
Ann. § 66-26-101 (2015).° In short, the Trents acquired the Property subject to Mrs.
> “[Jjudgments . . . obtained . . . in any court of record . . . of this state shall be liens upon the
debtor’s land from the time a certified copy of the judgment . . . shall be registered in the lien book in the
register’s office of the county where the land is located.” Tenn. Code Ann. § 25-5-101(b)(1). Tennessee
Code Annotated section 66-26-101 provides that judgments “shall have effect between the parties to the
same . . . without registration; but as to other persons, not having actual notice of them, only from the noting
thereof for registration on the books of the register, unless otherwise expressly provided.” Tenn. Code Ann.
§ 66-26-101.
Greene’s interest and the Banks’ judgment liens. Thus, the Petitioners sought to have the
quitclaim deed reformed to vest Real Estate Holdings with full ownership of the Property
as of March 10, 2010, and free from the Banks’ recorded judgment liens.
Courts have jurisdiction under Tennessee law to reform written instruments to
accurately reflect the parties’ agreement. Battle v. Claiborne, 180 S.W. 584, 587 (Tenn.
1915) (citation omitted); Sikora v. Vanderploeg, 212 S.W.3d 277, 287 (Tenn. Ct. App.
2006) (citing Greer v. J.T. Fargason Grocer Co., 77 S.W.2d 443, 443-44 (Tenn. 1935);
Tenn. Valley Iron & R.R. Co. v. Patterson, 14 S.W.2d 726, 727 (Tenn. 1929)), Reformation
is an equitable remedy “by which courts may correct a mistake in a writing ‘so that it fully
and accurately reflects the agreement of the parties.’” Lane v. Spriggs, 71 S.W.3d 286, 289
(Tenn. Ct. App. 2001) (quoting 22 Tenn. Jur. Rescission, Cancellation and Reformation
§ 46 (1999)),
A court may reform an instrument to correct a mutual mistake. Sikora, 212 S.W.3d
at 286 (citing Alexander v. Shapard, 240 S.W. 287, 291-94 (Tenn. 1922); Cromwell v.
Winchester, 39 Tenn. (2 Head) 389, 390-91 (1859)); Lane, 71 S.W.3d at 289 (citing
Williams v. Botts, 3 S.W.3d 508, 509 (Tenn. Ct. App. 1999)). Mutual mistake “is a mistake
common to all the parties to the written contract or the instrument or in other words it is a
mistake of all the parties laboring under the same misconception.” Collier v. Walls, 369
S.W.2d 747, 760 (Tenn. Ct. App. 1962). A party seeking to reform a contract because of
mutual mistake must show by clear and convincing evidence that:
(1) the parties reached a prior agreement regarding some aspect of the
bargain; (2) they intended the prior agreement to be included in the written
contract; (3) the written contract materially differs from the prior agreement;
and (4) the variation between the prior agreement and the written contract is
not the result of gross negligence on the part of the party seeking reformation.
Sikora, 212 8.W.3d at 287-88 (footnotes omitted) (citing 7 Corbin on Contracts § 28.45 at
283; 27 Williston on Contracts §§ 70:19 at 256, 70:23 at 264-65).
The trial court and the Court of Appeals focused on whether reformation may be
used to reform a quitclaim deed to add a grantor omitted because of mutual mistake. We
take a different path. We need not decide whether a missing grantor can be added to a
quitclaim deed because reformation, even if available as a remedy, is not appropriate here
based on the equities of the parties.
Reformation, being an equitable remedy, requires us to consider the equities of the
parties. See 27 Williston on Contracts § 70:24 (4th ed.) (July 2020 Update) (footnotes
omitted) (“The court has equitable discretion to grant reformation if it finds that to be in
the interests of justice. Since the remedy of reformation is equitable in nature, a court has
the discretion to withhold it, even if it would otherwise be appropriate, on grounds that
have traditionally justified courts of equity in withholding relief. The major limit to the
traditional exercise of equitable discretion is reasonableness.”).
A court should not reform a contract when doing so would unfairly affect the rights
of innocent third parties. Restatement (First) of Contracts § 504 (June 2020 Update); 21
Steven W. Feldman, Tennessee Practice Series, Contract Law and Practice § 6:69 (May
2019 Update) (“Courts will disallow reformation with intervening rights of innocent third
parties who would be unfairly affected by the remedy.”). Thus, reformation should not be
granted when it would defeat the rights of third parties who acquired an interest in the
property between the time of the execution of the original instrument and the execution of
the reforming instrument. See Johnson v. Johnson, 67 Tenn. 261, 263 (1874) (granting
reformation after noting that there were no creditors or purchasers for value without notice
that could object to reformation); Gibson v. Flynn, No. 88-120-II, 1988 WL 119257, at *3
(Tenn. Ct. App. Nov. 10, 1988) (“It is an almost universal rule of equity not to grant relief
by way of reformation to the injury of innocent third persons such as bona fide purchasers,
lienholders, and others who without notice have acquired intervening or vested rights... .”
(quoting Crahane v. Swan, 318 P.2d 942, 945 (Ore. 1957))).
Here, reformation of the 2010 quitclaim deed would deprive the Banks of their
judgment liens against the Property. The Banks protected their interests by obtaining
judgments and recording their liens in the Hamblen County Register of Deeds office after
Mr. Greene signed the 2010 quitclaim deed and before the execution of the 2017 corrected
quitclaim deed. See, e.g., In re Cunningham, 48 B.R. 509, 512 (Bankr. M.D. Tenn. 1985)
(stating that under Tennessee law, reformation will not be granted “where third parties have
acquired an interest in real property omitted from a deed without notice of the original
grantee’s adverse claim”); In re Hunt, 18 B.R. 504, 506 (Bankr. E.D. Tenn. 1982) (citation
omitted) (“Absent the intervening rights of others, a court of equity would reform the
instrument under the facts of this case. Other rights have intervened, however, and
reformation cannot be granted.”); Needham v. Caldwell, 154 S.W.2d 535, 538 (Tenn. Ct.
App. 1941) (stating that an instrument may be reformed based on mutual mistake “except
as the rights of third parties may prevent” (citation omitted)); but see Minton v. Long, 19
S.W.3d 231, 241 (Tenn. Ct. App. 1999) (stating that reformation will not be granted “if it
affects intervening rights of third persons who actually and justifiably rely upon recorded
instruments” (emphasis added) (citing MR. Bldg. Corp. v. Bayou Utils., Inc., 637 So.2d
614, 617 (La. Ct. App. 1994))). Courts in other states agree that the equitable remedy of
reformation should not be granted to the detriment of the intervening rights of third parties.
See, e.g., Sky Harbor, Inc. v. R.S. Jenner, 435 P.2d 894, 897 (Colo. 1968) (“[R]eformation
will not lie to the prejudice of a judgment creditor without notice who has a valid lien upon
disputed property.” (citation omitted)); Smith v. Pattishall, 176 So. 568, 572 (Fla. 1937)
(citation omitted) (noting that the equitable rights of third parties such as judgment
creditors may prevent reformation); Adams v. Smith, 6 La. App. 187, 191 (La. Ct. App.
1927) (stating that the court could correct an error in the property description unless the
correction would prejudice third parties who had “acquired rights in the meantime”);
Lowery v. Wilson, 200 S.E. 861, 864 (N.C. 1939) (stating that reformation of a mortgage
“cannot affect priority of a judgment lien acquired subsequent to execution of a mortgage,
but prior to the correction” and that “[t]he lien of a judgment creditor stands upon the
precise footing as that of a purchaser in good faith” (citation omitted)); Alkas v. United
Sav. Ass’n of Texas, Inc., 672 S.W.2d 852, 859 (Tex. Ct. App. 1984) (citation omitted)
(stating that the rights of a subsequent lienholder who did not have notice of a prior
mortgage are to be adjudicated in a reformation action); but see Davis v. Bunnell, 225 N.W.
6, 9 (lowa 1929) (citations omitted) (observing that judgment creditors do not have the
same rights as purchasers in an action for reformation); Gurske v. Strate, 87 N.W.2d 703,
705 (Neb. 1958) (“The equity of reformation is superior to the rights of general creditors.”);
Restatement (Second) of Contracts § 155 cmt. f, illus. 9 (June 2020 Update) (stating that
judgment creditors are not protected from reformation like innocent purchasers for value
because a judgment creditor “is not a good faith purchaser or other third party taking an
interest in property in a voluntary transaction”).
The Petitioners rely on Holiday Hospitality for the proposition that the rights of a
judgment lien creditor are inferior to those of the deed holder because the judgment creditor
merely files its lien in the appropriate office and advances nothing of value in reliance on
record notice. Holiday Hospitality, 232 S.W.3d at 53. But Holiday Hospitality is not on
point because it involved the priority of judgment lien creditors and the reinstatement of a
deed of trust that had been mistakenly released. Jd. at 47. The Court of Appeals’ analysis
was based on the standard for canceling the mistaken release of a trust deed rather than
reformation. /d. at 52.
The Banks protected their intcrests, but the Trents failed to do so. The Trents bought
the Property with constructive notice of the defect in the title and of the Banks’ liens, and
as such, were not bona fide purchasers for value. See Henderson v. Lawrence, 369 S.W.2d
553, 556 (Tenn. 1963) (noting that a bona fide “purchaser is one who buys for a valuable
consideration without knowledge or notice of facts material to the title” (citing Otis v.
Payne, 8 S.W. 848, 850 (Tenn. 1888); Hewgley v. Gen. Motors Acceptance Corp., 286
S.W.2d 355, 359 (Tenn. Ct. App. 1955))); Wallace v. Chase, No. W1999-01987-COA-R3-
CV, 2001 WL 394872, at *3 (Tenn. Ct. App. Apr. 17, 2001) (stating that a bona fide
purchaser “must have (1) purchased the property with value; (2) taken the property without
notice; (3) taken the property in good faith; and (4) would be prejudiced by reformation”
(citing 76 C.J.S. Reformation of Instruments § 58 (1994))); Black v. Pettigrew, 270 8.W.2d
196, 201 (Tenn. Ct. App. 1953) (finding that a party’s trust deed was a valid lien because
she was “an innocent purchaser for value without notice of any defects in the title’).
Constructive notice is “implied or imputed by operation of law and arises as a result
of the legal act of recording an instrument under a statute by which recordation has the
effect of constructive notice.” Blevins v. Johnson Cnty., 746 S.W.2d 678, 682-83 (Tenn.
1988). All recorded instruments such as deeds and judgments “shall be notice to all the
world from the time they are noted for registration, . . . and shall take effect from such
time.” Tenn. Code Ann. § 66-26-102 (2015). The warranty deed conveying the Property to
Mr. and Mrs. Greene as tenants by the entirety was recorded in December 2007; Mr.
Greene’s 2010 quitclaim deed was recorded in March 2010; the Banks’ judgment liens
against the Greenes were recorded in March 2013 and October 2013; and the quitclaim
deed of correction was recorded in March 2017. “The object of registration is to give notice
to creditors and subsequent purchasers.” Blevins, 746 S.W.2d at 684 (quoting Moore v.
Cole, 289 S.W.2d 695, 698 (Tenn. 1956)). By statute, the Petitioners had notice of Mrs.
Greene’s ownership interest and the judgment liens when they acquired an interest in the
Property.
Equity does not permit us to correct a mistake—to the detriment of the Banks—that
the Petitioners could have avoided with reasonable diligence. See Trigg v. Read, 24 Tenn.
(5 Hum.) 529, 541 (1845) (stating that equity will not grant relief to a party who by
reasonable diligence could discover the material facts); Bank of N.Y. Mellon v. Goodman,
No. M2013-01372-COA-R3-CV, 2014 WL 1516329, at *11 (Tenn. Ct. App. Apr. 16,
2014) (denying relief for a deed of trust mistakenly recorded in the wrong county because
a subsequent judgment creditor with properly recorded judgment liens should not be
penalized because of mistakes that “could have been avoided with just a little effort”);
Trustmark Nat’l Bank v. Deutsche Bank Nat’! Trust Co., No. W2009-01658-COA-R3-CV,
2010 WL 3269978, at *14 (Tenn, Ct. App. Aug. 19, 2010) (“[A] party’s failure to protect
its interests despite the opportunity and ability to do so is yet another factor courts should
consider when weighing the equities between the parties.”); Bankers Trust Co. v. Collins,
124 $.W.3d 576, 579 (Venn. Ct. App. 2003) (citing Leeper v. Cook, 688 S.W.2d 94, 96
(Tenn. Ct. App. 1985)) (noting that generally a court will not intervene to help a party that
has failed to protect its own interest).
III.
In sum, after considering the equities of the parties, we find that the Petitioners are
not entitled to reformation of the 2010 quitclaim deed. Reformation would work to the
detriment of the Banks by effectively extinguishing their recorded judgment liens and
would benefit the Petitioners who had constructive notice of Mrs. Greene’s interest in the
Property and the Banks’ judgment liens. Although on different grounds, we affirm the
judgment of the trial court and the judgment of the Court of Appeals denying the relief
sought by the Petitioners. The costs of this appeal are taxed to Scott Trent, Ted C. Trent,
Civis Bank, and William E. Phillips, Sr., as Trustee, for which execution may issue if
necessary.
SHARON G. LEE, JUSTICE