A funny thing sometimes happens when I’m really close to taking a judgment against somebody.
At some point after the initial demand letter goes out and usually before I take my judgment, they start transferring all their assets out of their name.
We’ve talked about this before. Tennessee has a 4 year statute of limitations for fraudulent conveyances, and so a creditor has the ability to “undo” these “eve of judgment” transactions.
But, nevertheless, when finances get bad and creditors are knocking at the door, debtors still transfer property out of their names.
The Tennessee Court of Appeals recently looked at a matter like this in Scott Trent, et. al. v. Mountain Commerce Bank, et. al., E201801874COAR3CV, 2019 WL 2575010 (Tenn. App. June 24, 2019).
In that case, two individuals owned a piece of real property and, in 2010, one of them quitclaimed all interest over to a third-party limited partnership. In 2012, creditors started taking judgments against the individuals and, in 2013, a judgment lien was recorded.
After another sale to some innocent third party buyers, the issue came to light: When only one of the individuals signed the 2010 quitclaim, was all the ownership interest transferred, i.e. did the 2013 judgment lien attach to that remaining interest?
The non-creditor parties argued that the clear intent of the 2010 quitclaim was to transfer all interests to the new owner. They even recorded a Deed of Correction to fix the omission of the other individual’s signature.
The argument was based on the concept of reformation of deeds.
“Reformation is an equitable doctrine 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).
“A court of chancery in Tennessee has the power to reform and correct errors in deeds produced by fraud or mistake. To be the subject of reformation, a mistake in a deed must have been mutual or there must have been a unilateral mistake coupled with fraud by the other party, such that the deed does not embody the actual intention of the parties.” Wallace v. Chase, No. W1999-01987-COA-R3-CV, 2001 WL 394872, at *3 (Tenn. Ct. App. Apr. 17, 2001) (internal citations omitted).
“Still, we have also held that reformation on the basis of mistake is only appropriate where the intent of both parties is clear and is the same.” Hunt v. Twisdale, No. M2006-01870-COA-R3-CV, 2007 WL 2827051, at *8 (Tenn. Ct. App. Sept. 28, 2007). “And, mistake must be shown by “clear, cogent, convincing evidence.” Lane, 71 S.W.3d 289-90 (quoting Dixon v. Manier, 545 S.W.2d 948, 950 (Tenn. Ct. App. 1976)); see also Sikora v. Vanderploeg, 212 S.W.3d 277, 287 (Tenn. Ct. App. 2006) (“Because the law strongly favors the validity of written instruments, a person seeking to reform a written contract must do more than prove a mistake by a preponderance of the evidence. Instead, the evidence of mistake must be clear and convincing.”). Sipes v. Sipes, No. W2015-01329-COA-R3-CV, 2017 WL 417222, at *3-4 (Tenn. Ct. App. Jan. 31, 2017).
The present opinion turned on the fact that the second owner didn’t sign the 2010 quitclaim. ” Tennessee law allows reformation of a deed when the instrument does not “reflect the true intent of the parties.” Holiday Hosp. Franchising, Inc. v. States Res., Inc., 232 S.W.3d 41, 51 (Tenn. Ct. App. 2006). Because only one owner signed the 2010 quitclaim, the text of the deed was clear, and a party not listed or referenced on the deed can’t assert a mistake or be added.
I’d guess that the parties absolutely intended that 100% ownership was to transfer in that 2010 quitclaim, and it’s not as easy as a decision as the Court makes it seem to be. In the end, the Court may have balanced the equities here.