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U.S. Bank National Association v. McColley

Court of Chancery of Delaware

December 27, 2018

U.S. Bank National Association, as Trustee for Chevy Chase Funding, LLC Mortgage Backed Certificates Series 2007-2
v.
Lynn A. McColley et al.,

          Submitted: September 14, 2018

          Seth A. Niederman, Esquire Fox Rothschild LLP Citizens Bank Center

          Seth J. Reidenberg, Esquire Tybout, Redfearn & Pell

          PATRICIA W. GRIFFIN MASTER

         Dear Counsel:

         Pending before me is a motion for summary judgment by the mortgagee's assignee seeking reformation of a mortgage or, alternatively, equitable subrogation or an equitable lien on the property, based upon the mutual mistake of the parties to the mortgage concerning the identity of the owners of the property securing the mortgage. The mortgage was executed by the mortgagors individually and not in their capacity as trustees of their trusts which actually owned the property. Mortgagors oppose summary judgment, claiming that mortgagee's assignee has not shown mutual mistake to support the reformation of the mortgage, the elements for equitable subrogation, or established an equitable lien. Based upon the reasons set forth below, I recommend that the Court grant the motion for summary judgment reforming the mortgage to reflect that the current owners of the property, the trustees of the trusts, are parties to the mortgage. This is a final report.

         I. Background

         In February of 2002, Defendants Lynn A. McColley ("Lynn") and Karen Kimmell McColley ("Karen"), husband and wife, acquired title to real property located at 416 NE 10th Street, Milford, Delaware (the "Property").[1] In June of 2002, Lynn and Karen executed a deed conveying title to the Property to their trusts, Lynn A. McColley Revocable Trust and Karen Kimmell McColley Revocable Trust (collectively, the "Trusts").[2] On or about November 9, 2003, the Trusts re-conveyed title to the Property to Lynn and Karen individually and Lynn and Karen executed a $3, 000, 000 mortgage on the Property with County Bank, in their names individually in connection with a refinancing transaction.[3] On November 10, 2003, Lynn and Karen executed a deed conveying title to the Property back to the Trusts.[4] The mortgage and deed transfers were all recorded on November 26, 2003. Lynn and Karen executed a second County Bank mortgage for $385, 000 on June 4, 2004 in their individual capacities and not as trustees of the Trusts.[5] On April 9, 2007, Lynn and Karen refinanced the two County Bank mortgages through a $3, 250, 000 loan obtained from Chevy Chase Bank, F.S.B. ("Chevy Chase"), and executed a mortgage on the Property securing the loan with Chevy Chase ("Mortgage") in their names individually and not as trustees of the Trusts.[6] Proceeds from that Chevy Chase loan were used to satisfy the County Bank mortgages.[7] Lynn and Karen also executed another mortgage on the Property with All Credit Considered Mortgage, Inc. d/b/a ACC Mortgage, Inc., for $170, 000, in their individual capacities, on December 8, 2009.[8]

         Plaintiff U.S. Bank National Association, as Trustee for Chevy Chase Funding, LLC Mortgage Backed Certificates Series 2007-2 ("Plaintiff"), is the successor-in-interest to Chevy Chase through assignment. On January 10, 2017, Plaintiff filed a complaint against Defendants Lynn, Karen, and the Trusts seeking to reform the Mortgage to reflect that Lynn and Karen, as trustees of the Trusts, are parties to the Mortgage; or, alternatively, to subrogate Plaintiff to lien positions held by prior mortgagees at the time the Mortgage was executed; or, alternatively, to grant Plaintiff an equitable lien on the Property.[9] Defendants answered, denying Plaintiff's claims and alleging affirmative defenses.[10]

         On July 19, 2018, Plaintiff moved for summary judgment, arguing the Mortgage should be reformed to reflect that the Trusts are parties to the Mortgage and it has a valid lien on the Property because all parties were mutually mistaken as to the owner of the Property at the time the Mortgage was entered into, which is a material term of the Mortgage, and all parties intended to encumber the Property with the Mortgage.[11] In the alternative, Plaintiff claims it is entitled to judgment subrogating it to lien positions held by prior mortgagees, or it has an equitable lien on the Property.[12]

         Defendants responded, in their August 24, 2018 Answering Brief, that Plaintiff is not entitled to summary judgment because it has not presented facts to show that Chevy Chase knew of the mistake in the Mortgage or to satisfy the elements of equitable subrogation; and an equitable lien is not appropriate since Plaintiff has an adequate remedy at law through title insurance and contract claims on the note executed by Lynn and Karen individually, and equitable rights do not run to Plaintiff as assignee of Chevy Chase.[13]

         In its September 14, 2018 Reply, Plaintiff asserts that mutual mistake has been sufficiently shown, since Lynn and Karen admit they were mistaken as to the identity of the Property's owners and Chevy Chase's misapprehension is apparent from the terms of the Mortgage; the elements of equitable subrogation have been demonstrated and Lynn and Karen will be unjustly enriched if subrogation is not granted; and potential third-party claims are not a substitute for an equitable lien and would not provide Plaintiff with collateral to secure repayment of the loan.[14]

         II. Analysis

         Under Court of Chancery Rule 56, the court grants a motion for summary judgment when "the moving party demonstrates the absence of issues of material fact and that it is entitled to a judgment as a matter of law."[15] Once the moving party has satisfied its burden, it falls on the non-moving party to provide "specific facts showing that there is a genuine issue for trial."[16] Evidence must be viewed "in the light most favorable to the non-moving party."[17]

         The first issue is whether reformation of the Mortgage is appropriate in this case. Reformation is "appropriate only when the contract does not represent the parties' intent because of fraud, mutual mistake or, in exceptional cases, a unilateral mistake coupled with the other parties' knowing silence."[18] The party seeking reformation must show, by clear and convincing evidence, that "the parties came to a specific prior understanding that differed materially from the written agreement."[19]Mutual mistake occurs when "both parties were mistaken as to a material portion of the written agreement," or "when both parties are under substantially the same erroneous belief as to the facts."[20] The court determines reformation based upon the facts as "they existed at the time of the agreement."[21] At the summary judgement stage, the party seeking reformation must show the Court that "a rational fact-finder, reviewing the summary judgment record, could find that the elements of reformation due to mutual mistake have been established under a clear and convincing standard."[22] The ...


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