SALEM FIVE MORTGAGE COMPANY, LLC v. WALTER A. LESTER and COURTNEY T. LESTER.

On remand from the Appeals Court, this case is before the court with instructions to determine at trial whether Salem Five Mortgage Company, LLC ("Salem Five") made a mistake for which it is entitled to reformation, or whether, instead, it intentionally funded a mortgage loan in which Walter Lester and Courtney Lester took title to property in Nantucket jointly, while only Walter Lester became obligated on the mortgage securing the loan. The Appeals Court held that the Lesters presented a "toehold" of alleged facts sufficient to avoid summary judgment on this issue, and that "if the Lesters can show at trial that Salem Five knew in advance of the closing that the Lesters planned to take title jointly, they may argue that this fact provides circumstantial evidence that Salem Five acted deliberately, instead of mistakenly, in closing the deal and advancing the funds." Salem Five Mortg. Co., LLC v. Lester, 90 Mass. App. Ct. 1110 (2016). [Note 1]

A trial was held before me over four days in June, 2017, and I took the matter under advisement following the filing by plaintiff and defendants of post-trial submissions on October 12, 2017. For the reasons stated below, I find and rule that Salem Five has proved its claim by full, clear, and decisive proof of mistake, and that it is entitled to reformation of the mortgage encumbering the Lesters' property.

FACTS

Based on the facts stipulated by the parties, the documentary and testimonial evidence admitted at trial, and my assessment as the trier of fact of the credibility, weight, and inferences reasonably to be drawn from the evidence admitted at trial, I make factual findings as follows:

1. The defendants Walter A. Lester and Courtney T. Lester have been married since 1996. In 2008, they were living in New York City with their three children.

2. The Lesters desired to move from New York to Nantucket. Mr. Lester (but not Ms. Lester), made a written offer to purchase property at 48 Arkansas Avenue in Nantucket (the "Property"), on April 25, 2008.

3. The written offer to purchase was accepted by the sellers, following which Mr. Lester retained an attorney, Ryan P. Kelly, to represent him in the transaction. Attorney Kelly represented Mr. Lester in the negotiation of a purchase and sale agreement and continued to represent Mr. Lester until the transaction was completed. After Mr. Lester obtained a mortgage commitment from the plaintiff Salem Five, Attorney Kelly also represented Salem Five as its settlement agent and closing attorney to handle the closing of the transaction. Attorney Kelly did not represent Courtney Lester at any point in the transaction.

4. Prior to executing a purchase and sale agreement, Mr. Lester applied to Salem Five for a residential mortgage loan in the amount of $300,000.00. Matthew Sanford, a loan officer at Salem Five, handled Mr. Lester's application. Mr. Sanford interviewed Mr. Lester by telephone for the purpose of filling out a "Uniform Residential Loan Application" (the "loan application"). The loan application was filled out using information provided by Mr. Lester to Mr. Sanford over the telephone; Mr. Lester later signed the loan application under an "Acknowledgment and Agreement" whereby he acknowledged that any misrepresentations he made on the loan application could subject him to civil liabilities and criminal penalties. In the loan application, Mr. Lester identified himself as the sole borrower, and in the box labelled "Manner in which Title will be held", Mr. Lester confirmed by his signature that he intended to hold title to the Property, "Individually".

5. On or about May 19, 2008, Mr. Lester and the sellers entered into a purchase and sale agreement for the sale of the Property to Mr. Lester. The purchase and sale agreement identified Mr. Lester as the only buyer, and he was the only signatory identified as a buyer. The purchase price identified in the agreement was $375,000.00, and the agreement contained a financing contingency allowing the buyer to rescind the agreement if he could not obtain a commitment for a mortgage loan for 80 percent of the purchase price, or $300,000.00, by May 21, 2008.

6. On May 19, 2008, the same date as the date of the purchase and sale agreement, Salem Five issued a Mortgage Loan Commitment letter addressed to "Walter A. Lester", approving "your application for a mortgage loan" in the amount of $300,000.00.

7. To fulfill one of the requirements of the commitment letter, Mr. Lester obtained a binder for insurance coverage for the Property. The binder identified the "insured" as Mr. Lester only.

8. The commitment letter identified the law firm of Mr. Lester's attorney as the "attorney for closing".

9. The Owner's Policy of Title Insurance issued in connection with the transaction, issued on behalf of Old Republic Title Insurance Company by its agent, Attorney Kelly's law firm, also identified Mr. Lester as the sole insured, and stated that "[t]itle is vested in: Walter A. Lester".

10. On May 29, 2008, an underwriter for Salem Five issued an "Underwriter's Certification", informally known as a "clear-to-close" letter, authorizing the completion of the loan transaction by the closing attorney and the release of the loan to Mr. Lester in the amount of $300,000.00, to complete the purchase of the Property, and confirming the terms of the loan, including, "Title will be held in the name of: WALTER A. LESTER".

11. Also on May 29, 2008, as a result of a request made to him by telephone by Mr. Lester, Attorney Kelly contacted by e-mail the sellers' attorneys, who were responsible for drafting the deed for the proposed transaction, and informed them that his client, Mr. Lester, would like to take title in the names of both he and Courtney Lester as tenants by the entirety. The sellers' attorneys complied with this request and drafted the deed with the grantees identified as both Mr. and Ms. Lester as tenants by the entirety.

12. Attorney Kelly did not inform Salem Five that Mr. Lester had requested to change the grantees on the deed, or that the deed had actually been changed to include Courtney Lester as an additional grantee; nor did he seek authorization from Salem Five for this change in how the transaction was to be closed.

13. I find that Courtney Lester never spoke or communicated in any way to any employee, agent or representative of Salem Five, and I find that Walter Lester never spoke or communicated in any way to anyone at Salem Five other than Mr. Sanford. I further find that Mr. Lester never communicated his request to have Courtney Lester appear as an additional grantee on the deed to Mr. Sanford or to anyone else at Salem Five, nor did Ms. Lester ever have any such communication. To the extent that Mr. Lester testified that he communicated to anyone at Salem Five his desire or intention to have Courtney Lester listed as an additional grantee on the deed, I find this testimony to be not credible and I do not credit this testimony.

14. The deed signed on June 11 and 12, 2008, respectively, by the two sellers, and registered with the Nantucket Registry District of the Land Court on June 13, 2008, conveyed the Property to "Walter A. Lester and Courtney T. Lester, husband and wife as tenants by the entirety". Transfer Certificate of Title No. 22987 was issued to indicate title in both Walter and Courtney Lester, consistently with the conveyance in the deed.

15. None of the other closing documents for the transaction reflected the title as conveyed in the deed. The copy of the loan application signed by Mr. Lester on June 11, 2011, in connection with the closing, continued to indicate that he was the sole borrower and that he would hold title "[i]individually". When presented with this copy of the loan application to sign in connection with the closing, the purpose of which is to confirm the accuracy of the information given by the borrower to the lender as of the date of the closing, Mr. Lester did not avail himself of the opportunity to correct the information regarding how he intended to take title, but instead signed the document, thus confirming the incorrect information that he intended to take title "individually". I find that Mr. Lester, a former Massachusetts-licensed real estate salesperson, did so intentionally, knowing this representation to be untrue.

16. In connection with the closing, which was conducted by mail, Mr. Lester executed a promissory note to Salem Five in the amount of $300,000.00, and a mortgage to secure the note. The mortgage, executed by Mr. Lester on June 11, 2008, identified the "Borrower" as "Walter A. Lester", and was signed only by him.

17. Of the purchase price of $375,000.00, Mr. Lester paid $75,000.00, and Salem Five paid $300,000.00 in accordance with the loan to Mr. Lester as approved in the Mortgage Loan Commitment letter.

18. The settlement statement prepared in connection with the transaction, dated June 11, 2008, identified "Walter Lester" as the "Borrower", was signed by Ryan P. Kelly as "settlement agent" and was signed by Mr. Lester as buyer (as well as by the sellers).

19. Other than the deed conveying the Property to Walter and Courtney Lester, Courtney Lester's name does not appear on any of the documents produced in connection with the transaction, including without limitation, the loan application, the Mortgage Loan Commitment letter, the insurance binder, the owner's title policy, the settlement statement, the promissory note, or the mortgage.

20. No payments have been made on the loan since July, 2012. As of April 1, 2017, the unpaid amount owed by Mr. Lester to Salem Five was $284,522.07 in principal and interest.

21. I find that it was not Salem Five's intention to loan Mr. Lester $300,000.00, secured by a mortgage on only a one-half undivided interest in the Property, but rather, I find that it was Salem Five's intention to make the loan only if it was secured by a mortgage signed by all of the owners of the Property.

22. I find that the granting of the loan by Salem Five to Mr. Lester, secured by a mortgage on only a one-half undivided interest in the Property, was the result of a mistake on the part of Salem Five.

23. I find that Mr. Lester was aware of Salem Five's mistake, and I further find that the mistake was a result, at least in part, of Mr. Lester's intentional misrepresentations to Salem Five as to how he intended to take title, and that he deliberately took advantage, knowing Salem Five was making a mistake.

24. I find that Courtney Lester delegated her interest and ceded all participation in the subject real estate transaction to her husband Walter Lester, and that she is bound by his conduct.

DISCUSSION

Reformation Based on Mistake

"[A] court acting under general principles of equity jurisprudence has broad power to reform, rescind, or cancel written instruments, including mortgages, on grounds such as fraud, mistake, accident, or illegality." Beaton v. Land Court, 367 Mass. 385 , 392 (1975); see G. L. c. 185, § 1(k) ("[The Land Court] shall also have original jurisdiction . . . of . . . [a]ll cases and matters cognizable under the general principles of equity jurisprudence"). See also JPMorgan Chase Bank, N.A. v. Niakaros, 24 LCR 757 , 760 (2016) (Foster, J.). "It is well established that legal instruments, including deeds, may be reformed on the ground of mutual mistake." America's Wholesale Lender v. Gurinian, 18 LCR 522 , 524 (2010) (Misc. Case. No. 351481) (Piper, J.), quoting Buk Lhu v. Dignoti, 431 Mass. 292 , 294 (2000). "[M]utual mistake supporting reformation is a mistake common to all the parties." Apfel v. Miller, 85 Mass. App. Ct. 450 , 455 (2014).

Under certain circumstances, a unilateral mistake may support a judgment of reformation. "As a general rule, reformation of an instrument may be warranted not only by fraud or by mutual mistake, but also by a mistake of one party . . . which is known to the other party" and "if the party knowing of the mistake fails to make it known to the mistaken party." Torrao v. Cox, 26 Mass. App. Ct. 247 , 250 (1988). "Reformation of an instrument may also be available on the ground of a unilateral mistake, where ‘the other party knew or had reason to know of it.'" Salem Five Mortg. Co., LLC v. Lester, 90 Mass. App. Ct. 1110 (2016) (Rule 1:28 Decision), quoting Nissan Autos. of Marlborough, Inc. v. Glick, 62 Mass. App. Ct. 302 , 306 (2004). This rule "is based on an analogy to misrepresentation by silence." Torrao v. Cox, supra, 26 Mass. App. Ct. at 250-251. "[F]ailure to correct another party's known mistake [may be analogized to] misrepresentation by silence." Apfel v. Miller, supra, 85 Mass. App. Ct. at 455, citing Ward v. Ward, 70 Mass. App. Ct. 366 , 369 n. 5.

"A party seeking recovery for a unilateral mistake must present full, clear and decisive proof that a mistake occurred . . . and that the other party knew or had reason to know of the mistake." Salem Five Mortg. Co., LLC v. Lester, supra, 90 Mass. App. Ct. 1110 . "To be entitled to reformation, a party must present full, clear, and decisive proof of mistake." Polaroid Corp. v. Travelers Indem. Co., 414 Mass. 747 , 756 (1993). Reformation may include direction to include property or parties omitted by error. W. M. Gullicksen Mfg. Co. v. MacNeil, 347 Mass. 568 , 575- 576 (1964).

In the present case, I find that it was the intention of Salem Five to enter into a loan transaction in which Salem Five would loan $300,000.00, to Walter Lester to purchase the Property, and in which the loan would be fully secured by a mortgage on the Property, that is, by a mortgage encumbering one hundred percent of the ownership interest in the Property. This conclusion is evidenced by the loan application in which Walter Lester represented to Salem Five that he was intending to be the sole owner of the Property and the sole borrower of the loan. It is further evidenced by the commitment letter indicating Salem Five's understanding that Walter Lester would be the sole owner and the sole borrower, and by the "clear-to-close" letter authorizing the closing attorney to close with Walter A. Lester to hold title to the Property. Salem Five's intention to enter into the transaction only if it received a mortgage on one hundred percent of the ownership interest in the Property is further evidenced by testimony at trial that institutional residential lenders in Massachusetts in general, and Salem Five in particular, do not as a rule enter purposefully into loan transactions in which they receive a mortgage that does not fully secure the loan they have made, that Salem Five's lending guidelines required a mortgage signed by all owners of a mortgaged property, and that at the time of this loan there were no mortgage products on the market in Massachusetts that would have allowed for a mortgage loan to be issued with fewer than all of the owners of a property being obligated on the mortgage. This intent on the part of Salem Five is also demonstrated by evidence that the loan would not be marketable in the secondary mortgage market unless the mortgage was signed by all of the owners of the Property.

I find as well that the reason the transaction was completed with both of the Lesters on the deed and only Mr. Lester on the mortgage, was a mistake made by Salem Five due to the fact that no one informed it of the change in the deed, a change which I find it was not aware of, did not agree to, and would not have agreed to unless Courtney Lester was added as a co-borrower on the mortgage. In reversing the earlier summary judgment in this action, the Appeals Court found a "toehold" of disputed fact with respect to whether Salem Five made a mistake, based on assertions by the Lesters in the summary judgment record, that (1) Attorney Kelly, who was representing both Mr. Lester and Salem Five, knew about the deed including both of the Lesters prior to the closing, and (2) Walter Lester had "told someone at Salem Five that he intended to take title jointly with Courtney." Salem Five Mortg. Co., LLC v. Lester, supra, 90 Mass. App. Ct. 1110 . "[I]f the Lesters can show at trial that Salem Five knew in advance of the closing that the Lesters planned to take title jointly, they may argue that this fact provides circumstantial evidence that Salem Five acted deliberately, instead of mistakenly, in closing the deal and advancing the funds." Id. The facts asserted in the summary judgment record to gain enough of a "toehold" to avoid summary judgment were ultimately not borne out by credible evidence at trial.

First, while Attorney Kelly did in fact know of Mr. Lester's request to include both his name and Courtney Lester's name on the deed, and indeed, he was the one to transmit that request to the sellers' attorney, his knowledge of the change in the deed is not binding on Salem Five, where, as here, the scope of his engagement with Salem Five was limited, and where, as here, there is no evidence that he communicated either the request for this change in the deed or the fact of the change in the deed to Salem Five at any time prior to completion of the transaction. Attorney Kelly was Mr. Lester's attorney from the beginning to the end of this transaction. He also was engaged to be the settlement agent and closing attorney for Salem Five. However, the scope of Attorney Kelly's representation of Salem Five was limited to serving as settlement agent and closing attorney, and did not extend him authority to authorize changes in the substantive terms of the loan approval. "Unlike the broad authority impliedly entrusted to an attorney in the conduct of litigation, see Burt v. Gahan, 351 Mass. 340 , 342-343, 220 N.E.2d 817 (1966), an attorney's implicit authority in contract dealings is more circumscribed. He has (absent express authorization) no power to bind his principal by his assent to substantial modifications in the contract terms." Torrao v. Cox, supra, 26 Mass. App. Ct. at 252.

These limitations, typical of the limited authority granted to an attorney handling a real estate closing for an institutional lender, are amply borne out by the evidence. Both the "Closing Instructions" and the "clear-to-close" letter explicitly limited Attorney Kelly's authority to closing the loan on the terms authorized by Salem Five, and did not permit him to unilaterally authorize a change in the grantee on the deed, or to authorize the acceptance of a mortgage signed by fewer than all of the owners of the Property, any more than he would have been authorized to change the amount of the loan. The clear-to-close letter, in particular, explicitly instructs Attorney Kelly that he is authorized to close only if, among other requirements, "Title will be held in the name of: WALTER A. LESTER". [Note 2] Further, Attorney Kelly testified consistently with the written evidence of the limits of his authority. He testified, and I credit his testimony, that Salem Five did not authorize him to close this loan in such a way that it received a mortgage on the interest of only one of the two owners of the Property, and that Salem Five had no reason to expect that the manner in which title would be held would be anything other than what was represented on the loan application. [Note 3] Furthermore, since Mr. Lester testified that he was not even aware that Attorney Kelly was representing Salem Five as well as Mr. Lester, Mr. Lester could not have relied on Mr. Kelly's knowledge of the changed deed as being imputed to Salem Five. [Note 4]

There was no other credible evidence that Salem Five authorized, or even knew of, the change in the deed to include Courtney Lester as an additional grantee. Courtney Lester testified that she believed that Salem Five agreed to have her name be on the deed but not on the mortgage, but could not state any factual basis for her belief, admitting that she never spoke to anyone at Salem Five, and that she had left the entire transaction up to her husband. [Note 5]

No other credible evidence supports a finding that Salem Five knew in advance or authorized the change in the deed or the execution of a mortgage that was not signed by both of the owners of the Property. Rather, the evidence convincingly showed, and I so find, that Mr. Lester knew of Salem Five's mistake and deliberately took advantage of it by failing to bring it to the attention of Salem Five.

I found Mr. Lester's testimony to be, in general, purposefully vague on direct examination, and purposefully unresponsive and evasive on cross-examination. More specifically, he testified on direct examination that his only conversations with anyone from Salem Five were with the loan officer, Matthew Sanford. [Note 6] On direct examination, he suggests obliquely, without ever saying so directly, that he informed Mr. Sanford that his intention was for both he and Courtney Lester to be on the deed and for the mortgage to reflect only his interest in the Property. [Note 7] He does not explain why the loan application, which he signed, and which was filled out with information he provided to Mr. Sanford over the telephone, contradicts these assertions. He does not explain why, if the loan application mistakenly listed him as the sole intended owner, he failed to bring this mistake to Mr. Sanford's attention.

However, on cross-examination, Mr. Lester suggests that he deliberately misrepresented how he intended to take title on the loan application, but that he did so on the advice of his attorney, loan officer, and real estate broker, who "steered" him to lie on the loan application. [Note 8] I credit Mr. Lester's testimony as an admission that he deliberately misrepresented on the loan application how he intended to take title, but I do not credit his attempt to throw the real estate broker, Attorney Kelly and Mr. Sanford under the bus as being complicit in his misrepresentation. Mr. Lester's testimony in this regard is explicitly contradicted by Mr. Sanford's testimony, which I credit, and is inconsistent with Mr. Kelly's testimony, which I also credit. Mr. Lester's testimony that Mr. Sanford participated in his misrepresentation is even belied by his own testimony on cross-examination, in which, when asked explicitly whether Mr. Sanford knowingly put false information on the loan application, Mr. Lester backed off of his earlier suggestion that he was advised to make the misrepresentation by Mr. Sanford. [Note 9]

Although Courtney Lester had no communications with Salem Five prior to the closing, as she deferred to her husband and left it to him to handle the entire transaction, his deliberate misrepresentations to Salem Five, and his knowledge of Salem Five's mistaken reliance on his misrepresentations, are imputed to and attributable to her for the purposes of application of the doctrine of mistake. Where, as she has acknowledged was the case with respect to this transaction, she left the handling of the entire transaction to her husband, [Note 10] she is "bound by his conduct and representations" with respect to this real estate transaction. Moran v. Gala, 66 Mass. App. Ct. 135 , 142 (2006).

Ratification

The Lesters argue in their post-trial submissions that they have established ratification of the deed and mortgage, through Attorney Kelly's conduct in accepting the change in the deed to reflect joint ownership by the Lesters, and by Salem Five's subsequent failure to do anything about the deed for several years after the 2008 closing. This issue is not properly raised by the Lesters, as it was neither asserted as a counterclaim nor raised as an affirmative defense. "[R]atification is an affirmative defense . . . ." Cabot Corp. v. AVX Corp., 448 Mass. 629 , 643 (2007). In their Answer and Counterclaim, the Lesters asserted three counterclaims: for trespass, for breach of contract, and for violation of G. L. c. 93A. They voluntarily dismissed all of these counterclaims in 2013. Also in their Answer and Counterclaim, the Lesters asserted twenty-two affirmative defenses, none of which even arguably asserts a defense of ratification. "[T]he omission of an affirmative defense from an answer generally constitutes a waiver of that defense." Sharon v. Newton, 437 Mass. 99 , 102 (2002).

Thus, I need not address the issue of ratification. However, I note that on the evidence presented, I would not find ratification had been proved even if it had been properly raised. "A principal may be bound by an agent's unauthorized acts if the principal expressly or impliedly ratifies the agent's acts." Colony of Wellfleet, Inc. v. Harris, 71 Mass. App. Ct. 522 , 528 (2008). The Lesters' theory of ratification is that, accepting that Attorney Kelly's acceptance and recording of the deed was not authorized by his principal, Salem Five (as I have found), then Salem Five's subsequent silence with respect to the unauthorized addition of Courtney Lester to the deed until the default on the loan four years later constituted a ratification of the deed and mortgage. However, notwithstanding the fact that the deed with the unauthorized additional grantee was in Salem Five's possession immediately following the June 13, 2008, closing, I accept and credit the testimony of Salem Five's representatives that Salem Five did not discover the error until the loan went into default in 2012. Accordingly, I find that Salem Five's conduct did not constitute a ratification of the unauthorized act of its agent in accepting and recording the deed with Courtney Lester as an additional grantee.

CONCLUSION

For the reasons stated above, I find and rule that Salem Five has proved its claim for reformation of the mortgage by full, clear, and decisive proof of mistake. Salem Five is entitled to reformation of the mortgage to include Courtney T. Lester as an additional mortgagor. Because I find and rule that Salem Five is entitled to reformation of the mortgage, I do not reach Salem Five's claims seeking alternative relief in the form of reformation of the deed to delete Courtney Lester as a grantee; equitable subrogation; or the imposition of an equitable mortgage.

Judgment will enter accordingly.