Fayetteville Real Estate & Dev., LLC v. Norwood

2012 Ark. App. 456

422 S.W.3d 154

FAYETTEVILLE REAL ESTATE & DEVELOPMENT, LLC, Appellant

v.Bradley D. NORWOOD and Christy A. Norwood, Appellees.

No. CA 12–44.

Court of Appeals of Arkansas.

Sept. 5, 2012.

C. Alan Gauldin, Springdale, for appellant.

Lisle Rutledge, P.A., by Stephen A. Lisle, for appellee.

LARRY D. VAUGHT, Chief Judge.

Fayetteville Real Estate & Development, LLC, brings this appeal from a judgment of the Washington County Circuit Court dismissing its claim for trespass; reforming the deed that appellees, Bradley Norwood and Christy Norwood, were given to their property, Lot 3 in The Falls Subdivision; and granting appellees' claim for quiet title. We affirm the circuit court's decision in all respects.

This case involves Lots 2 and 3, which are contiguous. Appellant now owns Lot 2, which is vacant, and the other vacant lots in the subdivision. Like the other lots, Lots 2 and 3 have setbacks in the front, back, and sides; there is also a utility and drainage easement between them. Legacy Building & Development, LLC (LB & D), was the original developer of the subdivision. It obtained a construction loan from United Bank (UB) and gave a mortgage to secure that loan on January 18, 2006; the mortgage was filed the next day. On September 13, 2006, appellees entered into a contract for LB & D to build and then sell them a house on Lot 3 for $252,000, using a house plan selected by appellees. The covenants and restrictions in the subdivision's bill of assurance required the home to be at least 2500 square feet and to have a three-car garage.¹

After being paid by LB & D, UB gave LB & D a release of Lot 3 from the mortgage on October 10, 2006; a partial satisfaction of mortgage was filed on October 12, 2006. During construction of the house to be purchased by appellees, LB & D's subcontractor erroneously laid the side-loading driveway leading to the three-car garage partially across Lot 2, mostly in the utility easement. Without knowing of this error, LB & D and appellees closed on the property on February 23, 2007; the deed was filed on March 1, 2007. All of the closing documents, including the deed, only referred to Lot 3 in the property description and did not expressly convey the driveway's encroachment on Lot 2.

LB & D renewed its loan with UB on April 18, 2007, and the related “modification of mortgage” securing LB & D's remaining debt was filed on May 15, 2007. The modified mortgage excluded the lots that had already been sold, including Lot 3. Also excluded from the mortgage was Lot 1, on which LB & D had begun building a house with a garage that faced Lot 2 and which was located twelve to fourteen feet from the boundary line between the lots.

On November 2, 2007, UB filed an action against LB & D to foreclose on the mortgage secured by the unsold lots. Dean Morris, d/b/a LB & D, filed a petition for bankruptcy on November 6, 2007.² UB obtained an in rem foreclosure decree; for the amount of its full judgment balance ($708,335.68), it purchased the unsold lots of the subdivision, including Lot 2. The circuit court confirmed the sale on April 14, 2008. UB sold the vacant lots, including Lot 2, to appellant by general warranty deed on June 27, 2008, for $725,000. Legacy National Bank foreclosed on a mortgage it held on Lot 1, with the partially-built home on it, and purchased that lot for $100,000 on July 29, 2008.

In the summer of 2008, appellees became aware that part of their driveway was on Lot 2. On November 17, 2008, appellant notified appellees that it considered their driving over Lot 2 to be a trespass and instructed them to either purchase Lot 2 (for $80,000) or cease trespassing. Appellees responded, through their attorney, that they had legal and equitable rights to use that portion of Lot 2. On July 6, 2010, appellant filed this action for trespass and ejectment. Appellees filed a counterclaim for quiet title and a third-party complaint against LB & D and Dean Morris for reformation of their deed. Appellees amended their counterclaim to include the establishment of an easement by necessity or by implication.

The case went to trial on September 1, 2011. Dean Morris, LB & D's sole owner; Brad Norwood; Gary Langham, who gave appellant an estimate for putting in a new driveway on Lot 3; John Scott, UB's president and CEO; Matt Patterson, a loan officer for UB; Greg Wise, a neighbor of appellees; and Don Pitts, UB's chairman of the board, who formed appellant (of which he is the president and owner) to buy this subdivision and other properties, testified.³ The trial court made the following findings in its order:

1. It was the intention of Legacy Building and Development (“LBD”) to convey to Bradley and Christy Norwood (“Norwoods”) the land upon which their driveway is situated when it passed the deed of February 23, 2007, to the Norwoods. The Norwoods intended to receive the same land and the fact that said land was not included in the legal description in the February 23, 2007 deed was the result of a mutual mistake of fact.

2. The Norwoods proved the intention of the parties, the mutual mistake of fact, and all elements of their reformation of deed claim beyond a reasonable doubt.

3. United Bank provided a partial lien release to allow the sale of the land from LBD to the Norwoods.

4. United Bank and Fayetteville Real Estate and Development, LLC both acquired title to Lot 2 that is the subject of this case, with notice of the claim to title of the Norwoods and therefore neither took title to that lot as a bona fide purchaser.

5. United Bank's interest as a mortgagee was not prejudiced by the conveyance of the land containing the driveway from LBD to the Norwoods.

The trial court dismissed appellant's claim for trespass; reformed appellees' deed to include the driveway depicted on the attached survey, which had been filed of record; and granted appellees' claim for quiet title. The court stated that, based on these rulings, it would not reach appellees' easement claim. Appellant filed a timely notice of appeal.

Appellant raises numerous points on appeal, two of which were not preserved for review. It argues that appellees' claims are barred by res judicata because title to Lot 2 was vested in UB in the court's order confirming the foreclosure sale of the property to UB. Appellant raised this affirmative defense but did not, however, develop or obtain a ruling on it below. We therefore need not address it. Waggoner v. Waggoner, 2012 Ark. App. 286, at 3, 423 S.W.3d 117, 119. Appellant also argues that the evidence was insufficient to establish an easement. Because the trial court expressly stated in its order that it would not rule on the easement claim, we will not do so. Id.

Most of appellant's points on appeal ⁴ are necessarily determined by our decision regarding the following arguments: (1) as the holder of all of the mortgagor's and mortgagee's interests as of the filing date of the mortgage, UB took priority over appellees; (2) notice of the construction on Lot 1 did not place a duty to resurvey Lot 2 on UB; (3) as the purchaser of UB's interest and priority, appellant's rights are superior to appellees'; (4) appellees failed to establish two necessary elements of reformation; (5) as a bona fide purchaser for value, appellant was not subject to appellees' claims; and (6) appellant did not assume the liabilities of LB & D.

Appellant asserts: “The Circuit Court erred in holding that LB & D ‘owned’ Lot 2 on the date Lot 3 was conveyed to the Norwoods. LB & D did not own legal title to Lot 2 on February 23, 2007. Legal title was held by UB, the mortgagee.” Our supreme court has long held that, although a mortgagee has legal title to the mortgaged property, it actually possesses a security interest and is not an absolute owner of the property; it does not hold, at law or in equity, an absolute, unconditional, and indefeasible title. City of Fort Smith v. Carter, 372 Ark. 93, 270 S.W.3d 822 (2008). A mortgage is simply an instrument evidencing a security for debt, and will be void upon the discharge of that debt. Moore v. Tillman, 170 Ark. 895, 282 S.W. 9 (1926).

It is true, as appellant contends, that LB & D did not have the unilateral power to adversely affect UB's recorded rights:

It has long been the law in this State that nothing can be done by the mortgagor, subsequent to the execution of a valid mortgage, which can impair the rights of the mortgagee. Deming Investment Co. v. Bank of Judsonia, 170 Ark. 65, 68, 278 S.W. 634 (1926). The mortgagor can make no contract respecting the mortgaged property which would bind the mortgagee or prejudice his rights. Baker–Matthews Lumber Co. v. Bank of Lepanto, 170 Ark. 1146, 282 S.W. 995 (1926). “Under this rule, it is beyond the power of the mortgagor to disturb the priority of the mortgage after its execution. Accordingly, dealings of the mortgagor with a third person, subsequent to the execution of the mortgage, cannot affect prejudicially the rights of the mortgagee.” 55 Am.Jur.2d Mortgages § 323 (1971). See also Whittington v. Flint, 43 Ark. 504 (1884). Furthermore, a mortgagee, after having his deed recorded, is not required to search the record from time to time to see whether other encumbrances have been put upon the land. Birnie v. Main, 29 Ark. 591 (1874).

Amstar/First Capital, Ltd. v. McQuade, 42 Ark.App. 185, 187, 856 S.W.2d 326, 327 (1993).

However, this case concerns whether the trial court clearly erred in ordering the equitable remedy of reformation, and cannot be decided by simply tracing legal title to, and the priority of liens on, Lot 2. To acknowledge that appellant possesses all of the legal rights of UB in Lot 2 does not resolve this case; as explained below, the case law is clear that a deed to property can be reformed even when the holder of record legal title resists it. Reformation is an equitable remedy that is available when the parties have reached a complete agreement but, through mutual...