Court of Appeals Issues Lien Priority Decision Arising From Scrivener’s Error in Deed

Here’s a fact pattern worthy of a bar exam question:

A Trust intends to convey to Developer a 100%, undivided fee simple interest in a tract of land (for the non-lawyers, Trust seeks to convey the whole kit-and-kaboodle to Developer).  Unfortunately, whoever prepares the deed effectuating this transaction is a tad sloppy, and mistakenly describes the estate conveyed as a “one-half fee simple interest,” rather than the full, undivided interest actually intended by the parties.

Along comes Lender, apparently unaware of the scrivener’s error, who provides construction financing to Developer for planned improvements to the parcel.  The loan is secured by a deed of trust, of course, which describes Lender’s collateral as Developer’s full, undivided interest in the parcel (which, unbeknownst to Lender, Developer does not actually have, at least not yet).

Contractor then begins making improvements to the parcel, under the belief that Lender has a first-position priority interest in the parcel that pre-dates Contractor’s commencement of work.  Contractor, however, is completely unaware of the scrivener’s error in the deed from Trust to Developer.

In time, Trust and Developer realize the error and record a corrected deed.  When Lender catches wind of what has occurred, it, too, heads to the Registry of Deeds, re-recording its original deed of trust on the parcel.  Ultimately, Contractor alleges it’s been stiffed by Developer, files a claim of lien, and then files a civil action to enforce its mechanic’s lien rights.  The action names Lender for the purpose of determining the relative priorities in the parcel, as Contractor seeks a judgment that its mechanic’s lien rights are  superior to Lender’s deed of trust, at least with respect to the one-half undivided interest that was not originally conveyed from Trust to Developer.   Which party stands higher on the priority ladder with respect to that one-half interest — Lender or Contractor?

Pens down, bar examinees!

In a December 6, 2011 opinion styled S.T. Wooten Corporation v. Front Street Construction, LLC et al., the Court of Appeals (“COA”) affirmed the trial court’s award of summary judgment to Lender.  Citing the general rule that “[w]hen a grantor, through a mutual mistake, conveys less to a grantee than was intended, the grantor holds the remaining portion of the property not conveyed in constructive trust for the grantee,” the COA held that general rules of equity supported Lender’s counterclaim seeking reformation of the deed from Trust to Developer and relating the reformation back to the date the original deed was recorded.

The COA’s decision emphasizes that Contractor was in no way prejudiced by this outcome, since Contractor believed at the time of commencement of its work that its interest in the parcel was junior to Lender’s.  In other words, reforming the deed put Contractor in the position is expected be in when it contracted to do the work originally.

My sense it that the decision reaches the right result under the facts of the case, but it leaves me troubled by the following question:  what if Contractor believed at the commencement of its work that Lender’s rights only extended to a one-half interest in the parcel, and that Contractor had a superior interest in the other half interest originally retained by Trust?  Applicable principles of law prohibit reformation where prejudice would result to the rights of a bona fide purchaser for value without notice or “someone occupying a similar status.”  Arnette v. Morgan, 88 N.C. App. 458, 462, 363 S.E.2d 680-81 (1988).  If Contractor believed from the get-go it had superior rights in at least a one-half undivided interest in the parcel, would Contractor occupy “a similar status”?

Something to ponder while sipping your holiday egg nog.  In the interim, click here for a full copy of the S.T. Wooten v. Front Street Construction, LLC decision.